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SEC Charges ICO Token Offering Platform as an Unregistered Broker-Dealer

On Sept. 11, 2018, the SEC filed an enforcement action against an online platform TokenLot that bought and sold digital assets and facilitated their sale alleging that TokenLot operated as an unregistered broker-dealer.  TokenLot described itself as an ICO superstore and operated a platform where retail investors could purchase digital tokens during and after an ICO.  Among other things, TokenLot allegedly facilitated sales of digital tokens offered by multiple issuers in ICOs; marketed the digital tokens; accepted investor orders and funds for payment; assisted ICO issuers transfer digital tokens to investors; disbursed proceeds of the sales to the issuer(s); and itself purchased digital assets at a discount during certain ICOs and then sold those digital assets to retail investors for a profit.  TokenLot earned fees in connection with its activities its activities. Neither TokenLot nor its operators were registered with the SEC in any capacity.

The SEC charged TokenLot and its founders with failing to register as a broker-dealer and for selling unregistered securities. Of particular note, the SEC did not allege any that TokenLot or its founders engaged in fraudulent activity.  As part of the settlement TokenLot and its founders were ordered to pay an nearly $480,000 in disgorgement and prejudgment interest, and its founders were also ordered to pay $45,000 each as a civil penalty and were barred from participating in the securities industry with the right to apply for reentry after three years. TokenLot is in the process of winding down.

 “This is the SEC’s first case charging unregistered broker-dealers for selling digital tokens after the SEC issued The DAO Report in 2017 cautioning that those who offer and sell digital securities must comply with the federal securities laws,” the SEC explained.

The enforcement action against TokenLot was the the SEC’s first cryptocurrency enforcement action against a non-issuer for failing to register as a broker-dealer. This enforcement action is an example of the SEC’s on-going efforts to regulate the offer and sale of digital assets and their secondary trading by targeting unlicensed third parties who facilitate transactions of digital assets that are deemed to be unregistered securities. 

© Polsinelli PC, Polsinelli LLP in California

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About this Author

Peter Waltz, Polsinelli Law Firm, Denver, Corporate and Finance Law Attorney
Counsel

Peter Waltz is dedicated to helping clients achieve their objectives by employing a comprehensive, interdisciplinary approach to their legal and business challenges. He advises companies in all phases of the business cycle and provides ongoing advice and counsel on day-to-day operational, business, and legal issues. This focus includes the preparation and negotiation of documents related to entity selection and formation, corporate structure, corporate governance, and commercial contract matters. Peter advises a variety of clients with their business transactions,...

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Richard Levin brings his experience as a senior legal and compliance officer on Wall Street and in London to bear in advising clients on corporate, securities and regulatory issues. A problem-solver by nature, his practice focuses on helping financial services and technology (FinTech) clients identify and address regulatory issues as they build their businesses.  

The FinTech sector is experiencing rapid changes that are producing innovative new technologies: digital currencies, blockchain technology, peer to peer lending, robo advisors, crowdfunding portals, and electronic trading platforms. These changes are challenging early stage companies and established financial services firms to understand the legal and regulatory issues associated with the development of these innovative technologies. Polsinelli is at the vanguard of these changes.

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