The United States Securities and Exchange Commission (SEC) has alleged that Hydrogen Technology Corporation and Moonwalkers Trading Limited manipulated the price and trading volume of the Hydro token.
According to the SEC, former Hydrogen CEO Michael Ross Kane hired Moonwalkers as the fintech’s market maker to “create the false appearance of robust market activity” in 2018. This partnership followed the distribution of the digital coin through direct sales, bounty programs and airdrops. Kane allegedly instructed Moonwalkers to sell the tokens in the “artificially inflated market” to gain more than $2 million of profit.
“Companies cannot avoid the federal securities laws by structuring the unregistered offers and sales of their securities as bounties, compensation, or other such methods,” Carolyn Welshhans of the SEC’s Enforcement Division said.
“As our enforcement action shows, the SEC will enforce the laws that prohibit such unregistered fund-raising schemes in order to protect investors.”
I was surprised to see the complaint develop facts about the airdrop. But it seems like the airdrop isn’t within the scope of the actual Howey analysis, just distributions through bounties and sales pic.twitter.com/TH3ipJcThR— Jeremy (@jeremysklaroff) September 28, 2022
The SEC filed the complaint in a Manhattan federal district court, citing that the companies and their respective chiefs had violated the U.S. securities regulations. Moonwalkers CEO Tyler Ostern agreed to pay over $40,000 in interest and disgorgement fund, pending approval by a New York federal court. The SEC added that “civil monetary penalties [were] to be determined at a later date.”
The SEC’s charges against Kane involved similar monetary penalties. It also sought to prevent the former chief from holding executive spots in financial companies in the future. The crypto community has since called out the SEC over the allegation.
“They say airdrops meet the Howey test's "investment of money" prong, even if no one makes an investment and no money changes hands,” Jake Chervinsky of Blockchain Association said.
“The SEC talks a lot about airdrops, but then only seems to argue that distributions via direct sales, bounty programs and employee compensation are securities transactions.”
To be fair, the complaint seems to suggest that the “bounties” where users were rewarded with tokens for a promotional action count for that clause. Not the generic airdrop.— Adam Cochran (adamscochran.eth) (@adamscochran) September 28, 2022
I still don’t think that should merit an “investment of money” but there is arguably more precedent.
At the moment, the SEC’s position on the role of airdrops in token schemes is unclear, although the body has regularly enforced actions against initial crypto token offerings. SEC commissioner Hester Peirce hinted in 2020 that the regulator considered coin airdrop a possible “offering of securities.”
Years ago, Peter Van Valkenburgh of Coin Centers warned the crypto community against using airdrops to distribute tokens. Because the SEC considers some tokens as security assets, “giving away tokens” through airdrops is still at the risk of violating securities law.
The SEC has often been criticized, not only by the crypto community but also by lawmakers. Congressman Brad Sherman, for example, said that the federal body must display “fortitude and courage” when dealing with securities cases within the crypto industry. According to Sherman, the SEC had yet to go after major crypto trading platforms that allegedly violated regulations
SEC expands unit to tighten crypto monitoring
Earlier this year, the SEC announced it would expand its enforcement unit to tighten crypto monitoring.
“By nearly doubling the size of this key unit, the SEC will be better equipped to police wrongdoing in the crypto markets while continuing to identify disclosure and controls issues with respect to cybersecurity,” SEC chairman Gary Gensler said.
The regulator also reportedly increased its budget in the next fiscal year as President Joe Biden had requested an additional $2.1 billion for the SEC to expand staff, which includes Cyber and Crypto Assets teams.