On July 14, 2021, the US Securities and Exchange Commission (SEC or Commission) announced settled charges against Blotics, Ltd., f/d/b/a Coinschedule Ltd. (Coinschedule), the UK-based operator of Coinschedule.com, a now-defunct website that profiled offerings of digital assets.1 The SEC charged Coinschedule with violations of the anti-touting provisions of Section 17(b) of the Securities Act of 1933 (the Securities Act). Section 17(b) makes it unlawful for any person to promote a security without disclosing that they received consideration for doing so or the amount of such consideration.2 Although the SEC has pursued anti-touting charges against website operators in the past,3 this is the first time that the SEC has brought anti-touting charges against a website operator in the digital asset space. Prior anti-touting actions in the digital asset space have been levied against individuals rather than website or platform operators.4
Significantly, Commissioners Hester Peirce and Elad Roisman issued a public dissent to the Order.5 The dissent takes issue with the Order’s failure to cite which digital assets listed on Coinschedule.com were securities and requests that the SEC address the present lack of clarity with respect to the application of the federal securities laws to digital assets.
According to the Order, Coinschedule owned and operated a website that publicized over 2,500 different offerings of digital assets from 2016 to August 2019. Coinschedule compiled background information and news about the offerings and the issuers’ developers and scored and ranked them based on different metrics and categories. The information on Coinschedule’s website was accessible by US persons, who made up a significant portion of the website’s users during this period.
Coinschedule primarily earned revenue from token issuers that paid to “list” their token offerings on the website. Coinschedule offered issuers tiered “marketing packages,” where for higher fees issuers would receive greater publicity and more prominent placement on the website. Coinschedule also offered issuers “extra” services for additional compensation, including introductions to digital asset trading platforms. Issuers and other persons could also purchase general advertising space on the website.
Coinschedule claimed to perform due diligence on each of the offerings profiled on its website and rated each offering with a “trust score” letter grade based on a “proprietary algorithm” that determined the “credibility” of the offering and was published on Coinschedule’s website. Coinschedule also provided guidance to issuers that purchased marketing packages from it on how to increase their trust score.
Coinschedule never disclosed to its website visitors the consideration it received from issuers to “list,” profile or otherwise advertise their tokens. The SEC staff seemed to take particular issue with Coinschedule providing a trust score and other services to issuers without sufficient disclosure to users, noting: “Coinschedule presented potential investors with seemingly independent profiles about token offerings when in fact they were bought and paid for by token issuers.”6 The SEC concluded that the tokens published on the website included digital asset securities, and therefore, Coinschedule had violated the anti-touting provisions of Section 17(b) of the Securities Act. Coinschedule was ordered to pay $43,000 in disgorgement plus prejudgment interest and a penalty of $154,434.
As further described below, key takeaways from the Order include (1) the “call to action” from Commissioners Peirce and Roisman for the SEC to update the murky regulatory status of digital assets, (2) the use of the anti-touting provisions to bring an action against Coinschedule and (3) the SEC’s exercise of jurisdiction over non-US persons.
1. Call to action from Commissioners Peirce and Roisman
As noted by Commissioners Peirce and Roisman’s dissent, the Order does not indicate which assets publicized on Coinschedule.com were securities. Instead, the Order summarily states without further analysis that “[t]he digital tokens publicized by Coinschedule included those that were offered and sold as investment contracts, which are securities pursuant to Section 2(a)(1) of the Securities Act.”7 The dissent notes that “providing clear insight outside of the enforcement context into the Commission’s investment contract determinations and analysis for digital assets would serve everyone well” and that “[o]ne of the ways to help work through the issue might be to develop a safe harbor along the lines of that which Commissioner Peirce has proposed, which would allow token offerings to occur subject to a set of tailored protections for token purchasers.”8 The dissent further observes that “in this void [of clear Commission-level guidance], litigated and settled Commission enforcement actions have become the go-to source of guidance.”9
2. The use of the anti-touting provisions to bring action against Coinschedule
The Order demonstrates that the SEC will use all the tools at its disposal to pursue conduct it believes may violate the federal securities laws. The decision by the SEC to bring anti-touting charges is notable because prior touting charges in the digital asset space have followed distinctly different fact patterns. In particular, the SEC has previously brought charges against popular public figures who used their celebrity to publicize initial coin offerings (ICOs) without disclosing the compensation they received from issuers.10 As a result, the application of anti-touting violations in this instance to a website operator is a departure from previous enforcement actions in connection with a digital asset.
3. Extraterritorial scope of the SEC’s jurisdiction
The extraterritorial scope of the Order also serves as a useful reminder because Coinschedule was based in the United Kingdom, not the United States. While the internet can be a useful tool to access a wide user base, it can also be used to bring foreign companies within the expansive scope of the SEC’s jurisdiction where a website is accessible to US persons. The Order specifically references that “a significant portion of Coinschedule platform’s web traffic originated from the United States” before measures were taken “to deter and prevent United States persons from viewing its content.” This is not the first time that the SEC has exercised extraterritorial jurisdiction with respect to digital assets. In SEC v. Telegram Group Inc. et al., the SEC was granted a preliminary injunction to halt the delivery of Grams, a digital asset security, to both US and non-US investors because the intended resale of Grams by non-US investors into the secondary market could make them potentially accessible to US purchasers.11 Firms operating outside the United States should therefore consider the ability of US persons to access their website or platform if they engage in conduct that could implicate US securities laws.
15 U.S.C. § 77q(b).
See, e.g., Complaint, SEC v. The Investors Registry, LLC et al., Civil Action No. 2:12-cv-02214-MEA (D. Ariz. 2012); SEC Litigation Release, SEC Charges Arizona Man With Acting As An Unregistered Broker and Unlawful Touting, LR-22511 (Oct. 17, 2012), https://www.sec.gov/litigation/litreleases/2012/lr22511.htm (An Arizona man profiled microcap issuers by posting information on his members-only website and sending emails to his website’s subscribers where he received consideration from several issuers.); Complaint, SEC v. Gun Soo Oh Park et al., 99 F.Supp.2d 889 (N.D. Ill. 2000); SEC Litigation Release, Yun Soo Oh Park and Tokyo Joe’s Societe Anonyme Corp., LR-16925 (Mar. 8, 2001), https://www.sec.gov/litigation/litreleases/lr16925.htm (While the Tokyo Joe matter involved a website operator that charged investors (instead of issuers) for advice related to certain stocks, the complaint alleges that, in at least one instance, Park indirectly received compensation from the issuer of a stock he recommended without disclosing his receipt of that compensation.); Complaint, SEC v. Stockstowatch.com, Inc. et al., Civil Action No. 98-2198-CIV T-26B (M.D. Fl. 1998); SEC Litigation Release, SEC Charges Internet Stock Touter with Securities Fraud, LR-15956 (Oct. 27, 1998), https://www.sec.gov/litigation/litreleases/lr15956.txt (A Florida man received shares of stock of companies he publicized on his website without disclosing it to users.).
See, e.g., In the Matter of Steven Seagal (Feb. 27, 2020), https://www.sec.gov/litigation/admin/2020/33-10760.pdf; In the Matter of Floyd Mayweather Jr. (Nov. 29, 2018), https://www.sec.gov/litigation/admin/2018/33-10578.pdf; In the Matter of Khaled Khaled (Nov. 29, 2018), https://www.sec.gov/litigation/admin/2018/33-10579.pdf; see also Public Statement, SEC Statement Urging Caution Around Celebrity Backed ICOs (Nov. 1, 2017), https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos.
See supra note 5.
See supra note 4.
SEC v. Telegram Group Inc. et al., 2020 WL 1547383 at *1.