The Securities and Exchange Commission (SEC) of the United States has cracked its whip and shut down TokenLot LLC, a platform that offered 200 cryptocurrencies, many of which were initial coin offering (ICO) tokens that could be considered securities. This sends out the message that the SEC is serious about stopping ICO traders who do not have a proper broker-dealer license, which is required to trade securities in the United States. This is the first time the SEC has charged an unregistered broker-dealer in the crypto space.
During 2017, the SEC decided that any cryptocurrency which was being bought by investors who expect profit and is largely controlled by a centralized organization would be considered a security. This includes almost all cryptocurrencies launched with an offering, effectively making ICOs illegal in the United States. It is possible to do an ICO with permission from the SEC but that requires an arduous and expensive legal process. Additionally, trading of crypto that are considered securities cannot be done without a broker-dealer license, which is hard to obtain. Only major firms like Coinbase have any chance of getting a broker-dealer license.
The only exceptions so far are Bitcoin and Ethereum, which have been declared to not be securities by the SEC since they are sufficiently decentralized. Regardless of this ruling, the SEC has been heavily policing the Bitcoin markets by rejecting numerous ETFs and halting an ETN.
TokenLot branded itself as an ICO Superstore and had been both trading crypto securities and actively participating in ICO fundraising, and had over 6,100 investors across 200 cryptocurrencies. Most of their business occurred after the SEC’s 2017 ruling which decided most ICOs were securities.
Owners Lenny Kugel and Eli Lewitt responded quickly to the SEC investigation and began unwinding investor positions. They worked with the SEC, resulting in penalties much less severe than they could have been. Ultimately, TokenLot must pay a USD 479,000 fine, and Kugel and Lewitt must pay USD 45,000 each, and are disbarred from securities trading for at least three years. There are no criminal charges, and the owners didn’t have to admit to any wrongdoing.
The moral of this story is that trading ICO crypto securities without a broker-dealer license is illegal and the SEC has the jurisdiction to enact severe penalties on anyone who defies regulations. In the TokenLot press release, the SEC adds a friendly reminder that anyone who wants to trade crypto securities legally can contact them, but not even big exchanges have had any luck at getting a broker-dealer license. Coinbase only managed to get a broker-dealer license by acquiring a company which already had one.
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