BitClave winds up with a SEC settlement greater than the amount raised in its public ICO


And so castles made of sand slips into the sea, eventually.” – Jimi Hendrix

Every time I write about an SEC ICO settlement, I think it’ll be the last one I am going to write about. 

I mean, at a certain point it’s just more of the same, right? But then I see a new filing, with some new crazy nuance, and I am back at it again. And that’s the case with today’s column, which covers the recent SEC settlement with BitClave, which was filed on May 28.

As a procedural reminder, there are a couple of ways that the SEC can go after people who issue unregistered securities.  They can go to federal court and file a lawsuit (see, for example the Telegram and Kik cases). The other route is an administrative proceeding, which doesn’t have the same precedential value as a court case but can end up having sharp teeth, nonetheless, as was the case here. 

Here’s a summary of what happened, from the order:

“BitClave is an early-stage blockchain services company that operates through an entity in Singapore and maintains its principal place of operations in San Jose, California. From June 2017 through November 2017, BitClave offered and sold securities in the form of digital tokens to fund the development of a blockchain-based search platform for targeted consumer advertising. As part of this process, BitClave conducted an initial coin offering (“ICO” or the “offering”) in which it raised approximately $ 25.5 million through the issuance of digital assets called Consumer Activity Tokens (“CAT”) to approximately 9,500 investors, including individuals in the United States.”

BitClave is headquartered in San Jose but apparently got the then-fashionable advice to incorporate in Singapore because, well, because reasons.  In June 2017, it started to market something the BitClave Active Search Ecosystem (“BASE”) which would allow people to be paid in CAT tokens for watching advertisements. 

It released the then-requisite whitepaper, promoted the sale on social media, and didn’t register the offering with the SEC or claim an exemption.  The whitepaper said that the money would be “pooled” in the “fundraiser” and used to create the BASE platform. The offering included a presale, a bounty program, and a final public offering in which “611 million CAT to approximately 8,500 purchasers during the final phase of the offering, including to persons in the United States, for the equivalent of approximately $ 24 million worth of digital assets. BitClave announced that it met its ‘hard cap’ of $25.5 million total raised within 32 seconds of the official start of this phase of the sale.”

The public sale took place in November 2017, smack-dab in the middle of the ICO craze. If you were following the space at the time, you may remember the lamentations of some who tried but failed to buy into these things with the expectation that their token would be listed on an exchange and then resold for a hefty profit.

So, at the time of the sale, the platform didn’t exist yet. The whitepaper said that the pooled funds raised would be used to develop the platform, and emphasized that development would lead to an increase in the price of the token:

“In its offering materials, BitClave stated that CAT would be used “internally within BASE among the participating parties” once the platform was developed and could incentivize users to participate in the BASE platform. It did not, however, identify any specific means for token holders to use CAT within the BASE “ecosystem.” Rather, BitClave stated that the tokens could be traded on digital asset trading platforms, and that BitClave planned to make trading of CAT available on digital asset trading platforms after completing the token distribution. CAT purchasers would have reasonably expected an opportunity to profit by selling the tokens following the token distribution.”

BitClave persuaded some crypto trading platforms to list it, and placed no restrictions on trading. In short, and so far, pretty standard fare. 

But there are some wrinkles. After raising $25 million in 32 seconds, things soured between the co-founders. BitClave sued a former officer, director and founder for misusing company funds raised in the ICO. After a three-week trial in November, a jury returned a verdict in the amount of $12.6 million against him. Meanwhile, because of the distraction of the lawsuit and associated costs, BitClave decided to wind down the business.

Relying on the familiar Howey framework, the Order says that the CAT tokens were investment contracts and unregistered securities, which did not qualify for an exemption. As a sanction, the SEC imposed a disgorgement penalty of $25,500,000, interest of $3,444,197 and an additional civil penalty of $10 million.

In short, these folks raised $25 million, almost immediately filed an ugly and expensive lawsuit – perhaps because they had no choice – got hit with an SEC investigation, and now have to pay more than they received in the ICO and try to collect a judgment against the errant cofounder in the meantime. BitClave is no longer listed on exchanges, the platform was never built and, as the castle made of sand, fell into the sea.

There’s so much going on here. The Singapore incorporation that provided zero protection, the “ecosystem” happy-talk and the whitepaper that basically proves Howey.  

Some of this is kinda par for the course, admittedly. The thing I wonder about is the impact of the collateral litigation with the cofounder on the SEC’s investigation and Order. One of the challenges that we do see in ICO-related private litigation is that by publicly filing, you are exposing details of your dispute – and potentially unlawful issuance – for the world (including the SEC) to see. 

Given the amount of money at issue here, it may be that they had no choice.  In any event, it appears that the $25 million in 32 seconds ended up costing all involved more than they raised — and resulted in the development of precisely nothing.

© 2020 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

BitClave winds up with a SEC settlement greater than the amount raised in its public ICO written by Stephen Palley @ June 5, 2020 Stephen Palley

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