SEC shuts down Unikrn with a heavy fine for its 2017 ICO, serving as an example for others

17 Sep, 2020 01:49
source: Singularity Financial

Singularity Financial Hong Kong September 16, 2020 – Online gaming and gambling platform Unikrn will pay a $6.1million settlement – “substantially all of the company’s assets” – for conducting an allegedly unlicensed initial coin offering (ICO) in 2017, according to the U.S. Securities and Exchange Commission (SEC).

Unikrn Shut Down by the SEC

Between June and October 2017, Unikrn raised $31.4 million through its UnikoinGold (UKG) initial coin offering to fund a crypto-enabled eSports betting platform. Before that, Seattle-based Unikrn raised $10 million in its Series A and Seed rounds from Ashton Kutcher, Mark Cuban, Shari Redston, Elisabeth Murdoch, and others.

Unikrn promised investors that it would try to get UKG listed on exchanges and increase demand for its token through its yet-developed betting platform, according to the SEC. The Commission found that UnikoinGold constituted a security and an investment contract, but the company failed to register the offering or qualify for an exemption.

In addition to the action from the SEC, the Washington State Department of Financial Institution is conducting an ongoing investigation involving Unikrn and is currently in settlement negotiations to resolve the matter, according to Bill Beatty, Securities Administrator at the Washington DFI.

According to blockchain attorney Jorge Pesok of Crowell & Morning LLP, the SEC indicated that Unikrn incorrectly filed a Form D for its pre-sale, which was not entitled to an exemption from registration under SEC Rule 506(c) of Regulation D.  Presumably, the SEC relied on its theory⁠—developed in its recent case against Telegram⁠—that SAFT investors are statutory underwriters. Therefore SAFTs are not entitled to the exemption from registration in Rule 506(c).

Unikrn agreed to settle the charges by paying a $6.1 million penalty, “substantially all of the company’s assets,” to be distributed to investors through a “Fair Fund.” The company also agreed to disable the UKG token and request the removal of the cryptocurrency from all crypto exchanges.

SEC Commissioner Hester Peirce Dissents

“The Commission is effectively forcing the company to cease operations because of an allegedly improper offering of supposed securities,” said SEC Commissioner Hester Peirce.

Peirce said that not only did she disagree with the SEC’s finding Unikrn committed a registration violation, imposing a penalty that large will have a chilling effect on innovation on the part of other firms.

“We should strive to avoid enforcement actions and sanctions, however, that enervate innovation and stifle the economic growth that innovation brings,” the commissioner said. “I believe that this action and its accompanying sanctions will have such consequences.”

Peirce used the opportunity to try to gain support for her “safe harbor” proposal that would allow companies like Unikrn a three-year window to experiment and perfect their platforms without fear of running afoul of regulators in this new area of finance.

“Imagine if such a regulatory safe harbor had been available to Unikrn,” Peirce said. “Instead of permanently disabling its tokens as a result of today’s settled enforcement action, Unikrn, in concert with its token holders, might be devoting its time and resources to identifying new uses for the token and expanding its user base.”

“By failing to challenge ourselves to experiment with new approaches to regulation, we, and those whose interests we are pledged to serve, risk surrendering the fruits of innovation.”

Enforcement Action Against Other ICOs

According to Jesse Proudman, CEO of Seattle-based crypto hedge fund Strix Leviathan:

“2017 was the year of the ICO boom and legal teams rushed to provide hasty guidance on how to conduct an ICO without issuing unregistered securities. Unfortunately for many, that guidance is proving to be legally shaky, and the SEC has been working through its backlog. The SEC has made it clear it is going to enforce its definition on securities offerings. Given the statute of limitations for these cases is five years, the coming two years will be eye-opening for many in the digital asset industry.”

The SEC has made it clear to companies that token offerings should be treated as securities. After two years of letting most major ICOs fly under the radar, the Commission is now ramping up enforcement.

Unikrn serves as an example that other companies that raised funding through an ICO must abide by registration or exemption requirements applicable to all U.S. securities offerings.

EOS and Sia settled with the SEC in 2019, and Enigma settled this year. All three companies were allowed to continue operating after paying a fine.

Two other companies faced much harsher penalties.

The SEC forced Telegram to return $1.7 billion for its 2018 TON token offering and was effectively forced to shut down its blockchain project. Another 2017 ICO, BitClave, was ordered to return the $25 million it raised from investors and pay a fine of $3.8 million and closed its doors after the settlement.