So far in 2020, the U.S. Securities and Exchange Commission (SEC) has brought fifteen enforcement actions in the offerings of digital assets space. Three of these actions do not involve fraud; rather, they allege solely violations of the registration provisions found in Section 5 of the Securities Act of 1933 (“Securities Act”), which are strict liability provisions that do not require proof of scienter or mental state. Even so, the consequences of a registration violation can be severe.
This week, the SEC brought a settled action for Section 5 registration violations against Unikrn, Inc., a Seattle, Washington based operator of an online eSports gaming and gambling platform. The SEC alleged that digital tokens that Unikrn sold to investors were “securities” within the meaning of the Securities Act and that Unikrn sold them without filing a registration statement with the SEC or qualifying for an exemption from registration.
As part of the settlement, Unikrn agreed to pay $6.1 million and agreed to several undertakings, including to permanently disable its digital tokens, publish a notice of the order instituting the settled proceedings on its website and social media channels, and take “reasonable steps to convey” the order to “digital asset trading platforms that offer trading of [its digital tokens] and request removal [of the token] from the platforms,” among other things.
The Unikrn settlement is notable because it resulted in a rare public dissent from an SEC commissioner, which is an unusual occurrence. Commissioner Hester Peirce noted that the $6.1 million civil penalty “represents substantially all of the company’s assets” and, in effect, “forc[ed] the company to cease operations because of an allegedly improper offering of supposed securities.” She noted that the analysis of whether a digital token offering constitutes a securities offering is “idiosyncratic by its very nature” and “does not produce clear guideposts for entrepreneurs and others to follow.” She pressed again for a regulatory safe harbor that would provide a three-year grace period for digital token offerors to develop a decentralized network, while being subject to the antifraud provisions of the federal securities laws, and only under certain conditions. “Although some may not see the loss of the benefits of innovation as large in this specific instance, posterity will feel the cumulative loss to society of innovation forgone because of such actions. Indeed, we will never know the full magnitude of such losses because some would-be entrepreneurs, having seen one too many Unikrns, may decide it wiser to shelve their most transformative ideas,” Commissioner Peirce added.
Although the other two non-fraud digital asset offering actions that the SEC brought in 2020 did not involve a public dissent, the SEC imposed serious sanctions on the issuers. In May 2020, the SEC settled with BitClave PTE Ltd., a blockchain services company, for conducting what the SEC alleged was an unregistered initial coin offering. The SEC ordered BitClave to disgorge the over $25 million it had raised from investors plus pre-judgment interest of over $3 million and pay a civil penalty of $400,000. The SEC’s order instituting the settlement also required BitClave to make disclosures on its website and social media channels, and request the removal of its token from digital asset trading platforms, among other things.
In February 2020, the SEC announced settled charges against Enigma MPC, a blockchain tech startup, for conducting what the SEC alleged was an unregistered offering. The SEC ordered Enigma to return the $45 million it raised from investors via a claims process, to pay a $500,000 civil penalty, among other things. Notably, however, Enigma was allowed to continue operating after complying with the SEC’s order.
When considered against previous Section 5 enforcement actions, the Unikrn, BitClave, and Enigma orders reflect a strong and strict approach by the SEC to combat non-fraud registration violations in the digital asset space. They do, however, provide some important takeaways.
First, Commissioner Peirce’s dissent strongly suggests that the SEC is having an internal dialogue as to how digital asset offerings should be treated, if at all, from an enforcement perspective. Until the SEC officially changes course, market participants should be mindful of the fact that issuers of digital assets may have to either: (i) register the sale of their digital assets under Section 5 of the Securities Act by filing a registration statement, such as on Form S-1 or F-1, with the SEC; or (ii) rely on an exemption from the registration requirements of the Securities Act, such as Regulation CF, Regulation A or Regulation D. When relying on such an exemption, proper documentation of the issuer’s efforts to comply with the exemption can prove useful in the event of later SEC scrutiny.
Second, digital asset issuers who have either engaged in what could be deemed to be an unregistered offering, including by virtue of failing to qualify for an exemption from registration, can consider self-reporting to the SEC, cooperating with the SEC staff during any inquiry or investigation, and the voluntary adoption of remedial measures. Outside the digital asset space, the SEC has settled matters in which cooperation substantially mitigated the sanctions, including that civil penalties were not imposed.
Finally, digital asset issuers should be mindful that their failure to comply with federal securities laws and regulations that apply to initial—and secondary—sales of digital assets often subject them to private securities class actions seeking rescission and damages. Token issuers, such as Unikrn, have faced enforcement actions brought by state regulators as well.
 https://www.sec.gov/spotlight/cybersecurity-enforcement-actions. In this article, we generally refer to “offerings of digital assets” to include “token offerings,” “initial token offerings,” “token launches,” “token sales,” “initial coin offerings,” or “ICOs”.
 In the Matter of Unikrn, Inc., Release No. 10841 (Sept. 15, 2020).
 See e.g., INX Limited, https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm (offering registered on Form F-1); Arca U.S. Treasury Fund, https://www.sec.gov/Archives/edgar/data/1758583/000121465920006145/j76202497.htm (offering registered on Form N-2).
 See, e.g., Blockstack PBC, https://www.sec.gov/Archives/edgar/data/1693656/000110465919039908/a18-15736_1253g2.htm (Regulation A offering).
 See, e.g., In the Matter of SAP SE, Adm. Proc. File No. 3-17080 (February 1, 2016) (FCPA case).