On December 18, 2019, the SEC issued an order instituting cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933, making findings, and imposing penalties and a cease-and-desist order with respect to Blockchain of Things Inc. (BCOT) in connection with an ICO allegedly conducted in violation of Sections 5(a) and 5(c) of the Securities Act. The order was part of a settlement between BCOT and the SEC.
BCOT is a blockchain technology company seeking to develop a blockchain-based technology and platform that are intended to allow third-party developers to build applications for message transmission and logging, digital asset generation, and digital asset transfer. From December 2017 through July 2018, BCOT conducted an ICO and raised proceeds worth approximately US $13 million.
Applying the test set forth in SEC v. W.J. Howey Co., the SEC determined that the BCOT tokens were securities and that the sale of those tokens was an unregistered securities offering because: (1) BCOT’s ecosystem was not developed at the time of the offering, functioning only in a “beta” or pilot phase; (2) the price of the tokens increased as more tokens were sold over time; (3) the tokens were convertible into “credits” and also freely transferrable on the secondary market; and (4) purchasers reasonably viewed the token offering as an opportunity to profit if the ecosystem was successful. In addition, the SEC determined that BCOT sold its tokens to U.S. investors without qualifying for an exemption to the registration requirements and engaged four “resellers” to sell its tokens in certain foreign countries without any restriction on the resale of those tokens to U.S. investors.
The SEC required BCOT to: (1) cease and desist from further violations; (2) register its tokens under Section 12(g) of the Exchange Act as a class of securities; (3) establish a notice and claims process by which purchasers of the tokens through the ICO may request a refund; and (4) pay a monetary penalty of US $250,000. BCOT did not admit or deny the SEC’s findings.