Blog Digital Currency Perspectives September 18, 2020

SEC Announces Settlement with Unikrn, Peirce Issues Statement in Opposition

On September 15, 2020, the SEC announced a settlement with Unikrn, Inc. (“Unikrn”)—an online eSports gaming and gambling platform based in Washington State—in connection with the SEC’s finding that Unikrn had conducted an unregistered offering of securities in violation of Sections 5(a) and 5(c) of the Securities Act.  According to the SEC’s cease and desist order, prior to June 2017, users on Unikrn’s platform could place bets on eSports events using “Unikoin” tokens, which had no utility outside the platform and did not trade on any secondary market.  In June 2017, however, Unikrn announced its plan to create and sell a new digital token called UnikoinGold (“UKG”).  The proceeds from sales of UKG were intended to be used primarily for platform development.  Unikrn shared its intention for UKG to serve as an alternative to fiat currency for (i) gambling on professional eSports matches; (ii) gambling on eSports games which users themselves participated in; (iii) trading for in-game virtual items; and (iv) paying gratuities to eSports personalities.  Unikrn allegedly represented that it would facilitate secondary-market trading for UKG, which it estimated would increase in value due to Unikrn’s development efforts. 

Between June and October, 2017, Unikrn conducted a “pre-sale,” during which select investors purchased UKG through Simple Agreements for Future Tokens (“SAFTs”).  From September 22 to October 23, 2017, Unikrn then sold UKG directly the general public. Unikrn raised approximately $16 million in its pre-sale and an additional $15 million through its public sale.  The SEC determined that the UKG tokens constituted an investment contract under the Howey test and that Unikrn’s sale of those tokens was an unregistered securities offering.  In a break from the SEC’s traditional settlement framework for Section 5 violations in the blockchain space—which would require Unikrn to register its token, setup a claims process to reimburse investors, and pay a civil monetary penalty—the SEC’s settlement with Unikrn instead required the company to: (1) cease and desist from violating the Securities Act; (2) permanently disable all of its tokens; and (3) pay a civil monetary penalty of $6.1 million, representing substantially all of the entirety of Unikrn’s assets.

The same day the settlement was announced, SEC Commissioner Hester M. Peirce issued a statement criticizing the terms of the Unikrn settlement, arguing that requiring Unkrn to effectively cease all business operations was a penalty disproportionate to the conduct at issue.  Peirce noted that “the determination of whether an instrument is offered and sold as a security in the form of an investment contract requires a subjective weighing of the facts and circumstances,” arguing that “Unikrn falls within the narrower category” of SEC enforcement actions in the blockchain space because, although Unikrn offered and sold its token in an unregistered offering that did not qualify for an exemption, it was “not alleged to have engaged in any fraud in doing so.”  Peirce admonished that the Commission “should strive to avoid enforcement actions and sanctions . . . that enervate innovation and stifle the economic growth that innovation brings.” Peirce then reiterated her proposal that the Commission develop “a well-designed, narrowly tailored regulatory safe harbor [which] would efficiently and effectively combine the Commission’s interest in protecting investors with developers’ ambition to experiment, arguing that such a solution “would provide benefits to token purchasers, token issuers, and the Commission.”