How a Crypto Startup Escaped With a Comical Fine After Illegal $4 Billion ICO

Journalist:
Ben Brown
October 1, 2019

Block.one – the company behind cryptocurrency EOS – was slapped with a $24 million fine this week, pertaining to its initial coin offering (ICO) back in 2017.

That might sound harsh, but it’s a tiny penalty. A drop in the ocean compared to the record-breaking $4.1 billion the company (reportedly) raised in its initial coin offering (ICO).

To be specific, it’s just 0.58% of the total amount raised – a slap on the wrist for violating US securities law.

It’s an arbitrary and dangerous precedent from the Securities and Exchange Commission (SEC) and risks triggering another wave of scammy ICOs.

It also proves the SEC still has little clue on how to regulate cryptocurrencies.

For the background on this, read CCN’s initial coverage of the fine.

Opening the floodgates for the next ICO wave?

What does the EOS settlement mean for the ICO industry? | Source: Mark Wilson / Getty Images / AFP

Nic Carter at Castle Island Ventures summed it up best:

“A lot of founders are going to think the SEC gave ICOs carte blanche after today and they’re going to get absolutely rinsed. Not sure how to feel about that.”

The SEC has effectively told crypto startups that the cost of launching an illegal securities offering is a 1% slap on the wrist.

Just like EOS, you can advertise your ICO on a billboard in Times Square and still claim you’re not targeting US investors!

The rise and fall of the EOS cryptocurrency. | Source: CoinMarketCap

The “nonsensical” SEC fine on Block.one’s ICO

The biggest problem with the Block.one ruling is the completely arbitrary nature of the penalty.

The ruling still doesn’t outline a clear red line for what constitutes a security (it implies the original EOS ERC-20 token was a security, but there’s no ruling on the native EOS token after it migrated to the mainnet).

In other words, the ruling and the penalty is completely random. One cryptocurrency advisor called it “nonsensical & wildly capricious.” Nic Carter explains why this is such a problem:

“Caprice and arbitrariness are absolutely the worst features of a regulator and yet there aren’t two more fitting words for the SEC.”

The cryptocurrency industry desperately craves clarity and guidance from regulators, and this arbitrary ruling delivers neither.

Worse, the SEC exists to “protect investors and promote fairness in capital markets.” This ruling may do the exact opposite: pave the way for more dangerous ICOs while making unfair, arbitrary judgments.

How did Block.one get away with such a tiny fine?

How the heck did EOS get away with it? | Source: Stanslavs/Shutterstock.com

The simple answer is good lawyers.

Katherine Wu, VC at Notation Capital, went through the settlement documents with a red pen and explained how Block.one got off lightly.

“For any of you wondering how EOS ‘got away’ with $24 million settlement… moral of the story here is ‘BE CO-OPERATIVE’”

The settlement documents reveal that Block.one promised to work closely with regulators in the future. They also played to the SEC’s core values. Block.one lawyers argued that any harsh penalty would have a knock-on effect on the US startups, entrepreneurs, and shareholders involved in the Block.one ecosystem.

The bottom line

To be clear, ICOs are not – as a rule – a bad thing. They’re an innovative approach to funding.

But they were wildly abused because of the lack of clarity and guidance from regulators. And as a result, we saw hundreds of scams and impossible claims. At least 70% of ICOs are now underwater.

The SEC just blew a huge chance to bring clarity and credibility to this new world of funding. Instead, they just paved the way for another monster wave of questionable ICOs, and investors are going to get screwed.

This article was edited by Josiah Wilmoth.

Last modified (UTC): October 3, 2019 11:17

Ben Brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk or on Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.