The US top regulator has stepped in to penalize yet another “initial coin offering” (ICO) after its operators failed to register their tokens as a security. The firm, Enigma MPC, is said to have raised close to $45 million following an ICO that began in 2017.
The SEC claims that the offering ran afoul of securities laws because the vehicle being offered could be considered securities, and thus the principles should have registered with the SEC as broker-dealers.
As part of the settlement, Enigma will pay a fine of $500,000 and start a process of returning funds to investors who purchased the token, register its tokens as securities, and files periodic reports with the SEC.
The Enigma project, which was started by a group of MIT graduates, offers a decentralized platform that allows users to create their own cryptocurrency hedge funds, by providing investment data and strategies for traders.
Before conducting its token sale, however, hackers were able to breach into Enigma’s website and also compromised a number of its social accounts, netting nearly $500,000 worth of Ethereum by sending out spam to users.
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“All investors are entitled to receive certain information from issuers in connection with a securities offering, whether it involves more traditional assets or novel ones. The remedies in today’s order provide ICO investors with an opportunity to obtain compensation and provide investors with the information to which they are entitled as they make investment decisions,” said John T. Dugan, Associate Director for Enforcement in the SEC’s Boston Regional Office.
Regulatory status of cryptos remains murky
As explained in the order, the SEC determined that Enigma amounted to selling securities without filing a registration or qualifying for a registration exemption.
The regulatory status of cryptocurrency offerings generally, remains somewhat murky. However, the SEC warned that securities law might apply to some virtual tokens depending on their specific characteristics. In those cases, securities registration, disclosure, and other requirements apply.
The SEC has taken enforcement actions against a dozen companies, putting their offerings on hold after issuing warnings. Further, it has frozen the assets of several cryptocurrency firms, halted ICOs, and suspended trading.
Earlier this month, Hester Peirce, an SEC regulator dubbed “CryptoMom,” has floated the idea of offering a ‘safe harbor’ to ICOs so that some crypto tokens are not treated as securities. Peirce proposed a three-year grace period for cryptocurrency startups to tweak their token-based fundraising models in new directions. As such, crypto tokens meeting specified criteria could be issued more freely before the SEC determine whether they need to comply with the federal securities laws.