As the agency pursues and prevents offerings of tokens it deems unregistered securities, further issues emerge.

By John J. Sikora Jr., Stephen P. Wink, Douglas K. Yatter, Cameron R. Kates, Shaun Musuka, and Deric Behar

The recent wave of US Securities and Exchange Commission (SEC) enforcement actions relating to initial coin offerings (ICOs) continues with two orders and a judicial complaint issued against digital asset firms for conducting unregistered securities offerings. The actions against, Nebulous, and Telegram are each notable for the facts and circumstances under which they were issued, but also as counterpoints to each other and previous ICO-related enforcement actions. This blog post offers a brief synopsis of these actions and discusses their impact on the evolving regulatory and enforcement landscape. — A More Reasonable Approach?

The SEC issued its first order on September 30, 2019, against for conducting an unregistered ICO. Offering participants paid over US$4 billion worth of Ether to purchase more than 900 million of’s ERC-20 tokens (Block Tokens), which were only transferable on the Ethereum blockchain until the Block Token ICO closed in June 2018. Thereafter, the Block Tokens were converted into EOS, a native token on’s blockchain platform known as EOSIO.

The SEC concluded that the Block Token ICO was a securities offering requiring registration in part because it was conducted to raise capital for the development of EOSIO, and US persons participated despite’s apparent good-faith preventive efforts (including notices of prohibition on sales, sales agreement disclosures, and geoblocking). neither admitted nor denied the SEC’s findings, but agreed to pay a US$24 million fine to settle the investigation. Although this fine appears small compared with the total ICO proceeds, some commenters believe it reflects the amount contributed by US persons.

Compared with the earlier enforcement actions against CarrierEQ, Inc. (Airfox) and Paragon Coin, Inc. (Paragon) regarding their unregistered ICOs (see SEC Ends 2018 Signaling Its Approach to Regulating the Cryptocurrency Markets), other aspects of the sanctions imposed on were relatively light as well. Unlike Airfox and Paragon, was not required to (1) register the Block Tokens as securities under Section 12(g) of the Exchange Act and file reports required by Section 13(a) of the Exchange Act, or (2) implement a claims process for ICO participants to receive a refund of their investment in exchange for returning Block Tokens in their possession. Moreover, the SEC agreed to waive the “bad actor” provisions of the securities laws that would have disqualified from conducting securities offerings in the future pursuant to Regulation A and Rule 506 of Regulation D. Notably, the order was silent as to whether EOS constitutes a security.

And Then There Was Nebulous

The SEC issued its second order on September 30, 2019, against Nebulous, Inc., a developer of decentralized cloud data storage technology. The order stems from Nebulous’ offering and sale of unregistered securities in 2014 and 2015, which notably predated the SEC’s DAO Report, the agency’s first public pronouncement that token offerings may constitute securities offerings (see SEC: Certain Initial Coin Offerings Are Securities Offerings).

Specifically, in May 2014, Nebulous raised approximately US$120,000 from the public offer and sale of SiaNotes. When Nebulous launched its decentralized cloud storage network in April 2015, it publicly offered to exchange SiaNotes for an investment asset (SiaFunds) that entitled investors to a share of Nebulous’ future revenue. The SEC found both SiaNotes and SiaFunds to be securities and issued a US$225,000 penalty against Nebulous for failing to register the offering of each. As with, and unlike Airfox or Paragon, Nebulous was not subjected to registration or rescission requirements in the enforcement action against it.

Similar to the order, the SEC’s order against Nebulous was silent as to whether the payment token for the cloud storage network, Siacoin — which is created via mining and sold to end-users on secondary exchanges — constitutes a security.

Telegram — What’s the Message?

The SEC took a third action on October 11, 2019, when it filed a judicial complaint in federal court in the Southern District of New York. The complaint sought a temporary restraining order and a preliminary injunction against Telegram Group Inc. that would prohibit the messaging-application creator from participating in any offering of unregistered securities, including distributing its Gram tokens to any person.

The case arises from Telegram’s offering and sale of a form of simple agreement for future tokens (SAFT) to fund the development of the Telegram Open Network (TON) Blockchain. The offering raised US$1.7 billion from 171 initial investors, of which approximately US$424.5 million was raised from 39 US residents. The terms of the SAFT required Telegram to deliver the Grams by October 31, 2019, or else return all investor funds.

The offering and sale was conducted pursuant to Rule 506(c) of Regulation D. However, the SAFT did not subject most purchasers to resale restrictions, meaning that upon conversion of the SAFT, purchasers could sell the Grams they received to the public (including non-accredited investors). Consequently, the SEC alleged that the sale of Grams to SAFT holders, and the expected sale from SAFT holders to the public, are a single plan of financing. As such, they are part of one securities offering that would not qualify for a registration exemption once Grams were sold to non-accredited investors. The “single plan of financing” issue is also central to an ongoing lawsuit between the SEC and Kik (see What SEC’s Lawsuit Against Kik Teaches Us About Token Presale Agreements).

In its initial response on October 16, 2019, Telegram denied that Grams are securities, saying they are intended to be used as a currency or commodity on the TON Blockchain following its launch. Nonetheless, Telegram agreed not to offer, sell, or deliver Grams until the court resolves the case. Beyond the temporary relief, the SEC is also seeking a final judgment to permanently prohibit Telegram from delivering Grams, as well as civil monetary penalties and disgorgement. Meanwhile, Telegram seeks to establish that Grams are not securities so that the company may deliver Grams to SAFT holders and proceed with the TON Blockchain project as planned. The next hearing is scheduled for February 2020.

Standard Orders, or a Path Forward for Tokens?

A plain-text reading of these orders provides helpful lessons; however, inferences may also be drawn — with a measure of caution — from what the SEC did not address. These orders clearly reinforce a known fact: failing to register a securities offering for traditional assets or digital assets can result in significant penalties. Additionally, some commenters believe the orders provide insight into the SEC’s view on a legal debate that has raged since the agency published its Framework for “Investment Contract” Analysis of Digital Assets: How must a token sold in a prior securities offering demonstrate “sufficient decentralization” such that it no longer constitutes a security? (See New SEC Token Guidance: This Is Howey Do It.)

Some commenters remain skeptical of EOS’s approach to decentralization, while others interpret the SEC’s silence as to whether EOS constitutes a security as evidence that it is not a security because EOSIO is already sufficiently decentralized or on the path to becoming so. Similarly, some market participants have read the SEC’s silence regarding the status of Siacoin as supporting a view that Nebulous’ network is sufficiently decentralized. In both cases, the SEC’s silence raises additional questions regarding the definition and composition of sufficiently decentralized networks. Which characteristics weigh more heavily in determining the sufficiency of decentralization (e.g., methods for consensus, governance, or economic rights) remains unclear.

While this issue may remain unresolved without further SEC guidance, another issue is heading toward resolution. The Telegram action is a warning to issuers that tokens sold via SAFTs or similar agreements may be part of a single plan of financing, a notion that Latham & Watkins lawyers have raised since the SAFT’s inception (see the original Yellow Brick Road for Consumer Tokens: The Path to SEC and CFTC Compliance, recently revised). Should the SEC prevail, the SAFT may fall further out of favor with issuers.


To confuse matters further, the media have reported that a number of the companies subject to earlier SEC enforcement actions for unlawful ICOs (including the aforementioned Paragon and Airfox) are having difficulty meeting the SEC’s settlement terms. The SEC is reportedly extending its stipulated deadlines for the companies to make penalty payments as well as respond to customer requests for information and remuneration. Could the failure of these companies to satisfy the SEC’s requirements be another potential reason the SEC has been experimenting lately with a relatively lenient enforcement approach? Ambiguous signals in fact-specific SEC orders may make for interesting commentary, but the market continues to call for overt guidance (and even rulemaking) to clarify the SEC’s parameters for a sufficiently decentralized network.