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Unregistered ICO by Blockchain Company for Healthcare Providers Results in No Fine Despite SEC Enforcement Proceeding – Lexology

SimplyVital Health Inc. was assessed no fine by the Securities and Exchange Commission to settle an enforcement action alleging that it engaged in an unlawful securities offering without registering the securities when it offered and sold digital tokens to raise funds for a new venture in 2017 and 2018. The firm consented to a cease-and-desist order and agreed never to violate any US securities registration requirement again.

According to the SEC, during the relevant time, SimplyVital sought to develop a blockchain-based system – Health Nexus – through which healthcare providers could share patient data. To accomplish this, it organized a sale of a proposed new digital token know as Health Cash or HLTH – which ultimately would be used as the currency on Health Nexus. Although SimplyVital planned for a pre-sale of HLTH solely to so-called “accredited investors” relying on an exemption from registration (click here to access information regarding Regulation D), the company did not take “reasonable steps” to verify that purchasers were appropriately qualified, claimed the SEC. Moreover, the SEC said that SimplyVital expressly solicited investors through general solicitations “including through internet postings and direct communications with US persons”.

However, after being contacted by SEC staff, SimplyVital determined not to generate any HLTH tokens and returned “substantially” all funds claimed by investors as a result of their initial investment. The SEC said this represented “substantially” all of SimplyVital’s assets.

In other legal and regulatory developments involving cryptoassets:

  • Major Cryptocurrency Exchange Cited for Misleading Ads by UK Overseer of Advertising Standards: The Advertising Standards Association – the UK’s independent regulator of advertising – upheld complaints against HDR Global Trading Ltd. (BitMEX) for allegedly running a newspaper advertisement that it concluded was misleading. The regulator said that the advertisement overstated the profit potential of bitcoin without referencing the risks of investing in the digital asset. ASA stated that the advertisement – which appeared on January 3, 2019 – could not run again in its same form and that, going forward, financial information included in advertisements by BitMEX must be understandable and adequately address risks. No fine was assessed. BitMEX claimed that the advertisement was not a promotion for investing in bitcoin, but instead was published as a commemoration of the 10th anniversary of the mining of the first bitcoin block.
  • NYDFS Designates Bakkt as Limited Liability Trust Company; ICE Futures U.S. Schedules Physically Deliverable Bitcoin Futures Launch to Begin September 23: Bakkt Trust Company LLC was granted a charter to operate as a New York State limited liability trust company. In connection with this authority, Bakkt will be authorized to provide custody services for bitcoin in connection with the launch of potentially physically settled bitcoin futures contracts listed on ICE Futures U.S. and cleared through ICE Clear U.S., both Bakkt affiliates. According to NYDFS, Bakkt will service institutional customers. Separately, IFUS announced it will launch trading in its Bakkt Bitcoin Monthly and Daily futures contracts beginning September 23, 2019.
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Previously, the Commodity Futures Trading Commission approved LedgerX as a designated contract market, enabling it to offer physically settled bitcoin swaps to retail persons. (Click here for details in the article “LedgerX Authorized to Offer Physically Settled Bitcoin Swaps to Retail Persons by CFTC Order” in the June 30, 2019 edition of Bridging the Week.) Additionally, Eris Clearing LLC was recently approved by the CFTC as the first derivatives clearing organization authorized to clear fully collateralized virtual currency futures contracts; it intends to offer the clearing of bitcoin futures contracts traded on its affiliate Eris Exchange LLC (together, branded as ErisX) beginning later in 2019. (Click here for further background in the article “CFTC Approves New Clearing House as First Derivatives Clearing Organization for Fully Collateralized, Deliverable Virtual Currency Futures” in the July 7, 2019 version of Bridging the Week.)

Legal Weeds: To date, the SEC has treated gingerly firms that engaged in what it considered unregistered digital securities offerings, provided no fraud was involved, and the entities returned raised funds to investors among other remedial measures.

In addition to its settlement with SimplyVital Health, earlier this year, the SEC settled charges again Gladius NetworkLLC alleging that the firm’s initial coin offering of GLA tokens intended to be used as the currency for a blockchain-enabled cybersecurity service constituted an offering of unregistered securities in violation of applicable law. Although Gladius’s Terms and Conditions of Token Sale expressly noted that GLA tokens were “not being structured or sold as securities or any other form of investment product,” the SEC said that the firm’s principals and agents discussed the prospects for investment returns from GLA tokens on various social media; Gladius took steps to have GLA tokens traded on significant digital asset trading venues; and Gladius pronounced after the ICO that it entered into a “partnership” to list GLA tokens on “one of the top cryptocurrency exchanges in the world.” 

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As a result, said the SEC, purchasers of GLA tokens “would have reasonably expected that they could obtain a future profit from GLA [t]okens if the entrepreneurial and managerial efforts of Gladius’s founders, employees and agents succeeded” regardless of whether they ever used the Gladius service. The SEC did not charge that Gladius committed any fraud in connection with its ICO.

To resolve the SEC’s allegations, Gladius agreed to register GLA tokens as a class of security and compensate investors, among other undertakings. However, the SEC imposed no fine on Gladius because of the firm’s remedial steps, including its self-reporting of a possible securities law violation and cooperation with SEC staff. (Click here to access the Gladius settlement order.)

In November 2018, the SEC filed and settled two enforcement actions against issuers of ICOs – Carrier EQ Inc. d/b/a/ AirFox and Paragon Coin, Inc. – for violating securities registration requirements. These cases represented the first time the SEC assessed fines in connection with a non-fraudulent ICO.

At the same time it published the AirFox and Paragon settlement orders, the SEC’s Divisions of Corporation Finance, Investment Management and Trading and Markets issued a “Statement of Digital Asset Securities Issuance and Trading” that, among other things, noted that the two settlements provided an express “path to compliance” for prior issuers of unregistered or not lawfully exempt cryptosecurities. (Click here for background regarding the SEC’s Divisions’ statement as well as the Air Fox and Paragon settlements in the article “SEC Assesses Penalties for Non-Fraudulent Initial Coin Offerings and Requires Registration; Issues Advisory on Issuance and Trading of Cryptosecurities” in the November 18, 2018 edition of Bridging the Week.)


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