Shearman & Sterling LLP | FinTech Insights | SEC Stays Active in the Digital Asset Enforcement Space, Delays Bitcoin ETF Decisions 
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  • SEC Stays Active in the Digital Asset Enforcement Space, Delays Bitcoin ETF Decisions 
    08/22/2019
    In the first three weeks of August, the Securities and Exchange Commission (SEC) commenced or settled three enforcement actions related to digital assets and delayed rule change decisions on three separate bitcoin exchange-traded fund (ETF) applications.  The enforcement actions reflect the SEC’s continued commitment to applying all aspects of the federal securities laws in the digital asset space. Meanwhile, the delay of  resolving the ETF rule change applications suggests that the SEC is likely still collecting information to evaluate whether certain of the agency’s previous concerns regarding bitcoin ETFs, such as those related to potential market manipulation and liquidity, have been addressed.

    ICO Rating

    On August 20, 2019, the SEC announced a settled enforcement action against ICO Rating, a ratings firm for digital assets and initial coin offerings (ICOs), for allegedly failing to disclose payments received from issuers for publicizing their digital asset securities offerings.  ICO Rating produced research reports and ratings of digital assets that it claimed were independent and publicized them on their website.  However, the SEC alleged that ICO Rating failed to disclose the fact that it received funds from certain issuers whose offerings the firm rated. While such allegations have long been the bread and butter of the SEC’s Enforcement Division in the penny stock space, this is the first time such allegations have been brought against a promoter of digital assets.

    In a statement, Melissa Hodgman, Associate Director of the SEC’s Enforcement Division said that the requirement to disclose compensation for promoting investments “applies regardless of whether the securities being touted are issued using traditional certificates or the blockchain.”

    Veritaseum

    On August 12, 2019, the SEC obtained an emergency freeze against Veritaseum, Inc. and Veritaseum, LLC, and their control person, in connection with alleged violations of the registration and antifraud provisions of the U.S. federal securities laws related to a digital asset security offering. 

    The SEC alleges that the defendants operated a fraudulent scheme to market and sell digital securities called “VERI” tokens to investors online by misleading investors about a prior business venture and the use of offering proceeds, touting exaggerated demand for VERI and claiming to have a revenue-generating product when no such product existed.  The SEC further alleges that the control person manipulated the price of VERI on an unregistered digital asset trading platform and that the control person transferred a significant amount of investor assets to his personal account.

    Marc Berger, Director of the SEC’s New York Regional Office, added that, “whether in digital currency or plain cash, [the SEC] will act to protect investor assets and to pursue fraud and manipulation in [U.S.] securities markets.”

    SimplyVital Health

    On August 12, 2019, the SEC announced that it has settled charges against SimplyVital Health, Inc. for failing to register a digital asset securities offering. 

    In 2017, SimplyVital announced plans to issue a digital token called Health Cash (HLTH) to raise money to support the creation of a so-called “healthcare-related blockchain ecosystem.” At the same time, the company announced that it would offer a pre-sale of the HLTH tokens through Simple Agreements for Future Tokens (SAFTs), under which HLTH sold would be not be distributed to investors until the official launch of the ICO.

    SimplyVital ultimately did not offer or sell the HLTH tokens and voluntarily returned substantially all of the funds raised through the SAFTs.  However, the SEC found that the company failed to verify the status of SAFT participants as accredited investors, file a registration statement or qualify for an exemption before offering and selling HLTH through the SAFTs, thereby violating the registration provisions of the Securities Act of 1933. 

    ETF Rule Change Delays

    On August 12, 2019, the SEC announced that it has delayed action on three proposed rule changes that would allow the listing and trading of shares of three separate bitcoin-related ETFs.  The proposals would allow the Cboe BZX Exchange to list and trade shares of an ETF issued by the VanEck SolidX Bitcoin Trust, and would allow NYSE Arca to list and trade shares of ETFs issued by the Bitwise Bitcoin ETF Trust and the United States Bitcoin and Treasury Investment Trust (managed by Wilshire Phoenix), respectively.

    The new deadlines for the SEC to come to a decision on the proposed rule changes are as follows:
     
    • September 29, 2019 for the U.S. Bitcoin and Treasury Investment trust application;
    • October 13, 2019 for the Bitwise Bitcoin ETF Trust application; and
    • October 18, 2019 for the VanEck SolidX Bitcoin Trust application.