The SEC says the company has offered unregistered offers and sales of cryptocurrency securities in the form of the HYDRO token, which is miniscule with a fully diluted market cap of $ 416,000. The agency also claims that Hydrogen oversaw a scheme to manipulate the trading volume and price of HYDRO that brought in more than $ 2.2 million in profits.
In its lawsuit, the SEC said that Tyler Ostern, CEO of Moonwalkers Trading Limited, the self-described market-making firm for Hydrogen, also participated in the alleged scheme.
“Hydrogen and Kane offered and sold cryptocurrency stocks called Hydro tokens and privately hired Ostern to fraudulently manipulate the price and volume of Hydro tokens traded on cryptocurrency trading platforms so that Hydrogen could sell their Hydro tokens at a profit. major, “the complaint said.
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The action is the latest in a flurry of enforcement measures by US authorities. Last week, the Commodity Futures Trading Commission sued a DAO for failing to register crypto derivatives as securities. By targeting relatively small players, the agency appears to be trying to send a message to more valuable projects to register their tokens as stocks or investment contracts.
The complaint notes that HYDRO tokens were distributed through reward programs, employee compensation, direct sales to the public via exchanges and an airdrop.
After issuing the HYDRO token, the SEC claims that Kane hired Moonwalkers Trading to create the illusion of strong market activity for the HYDRO token, allowing Hydrogen to sell the token in an “artificially inflated market” for profit. .
The complaint cites communications between Ostern and Kane suggesting that Moonwalkers Trading attempted to manipulate HYDRO’s price for Kane.
“Starting slowly, trying to keep the selling pressure at a minimum until we are able to build enough capital to really make the market move higher,” Ostern said on October 11, 2018, according to the complaint. He added that the pair “would have plenty of excuses to raise the price and sell to the FOMO guys along the way.”
“The defendants profited from their manipulation by creating a misleading picture of Hydro’s market activity,” said Joseph Sansone of the SEC’s Enforcement Division.
Draw the fire
Like previous stocks, the Hydrogen suit has drawn the attention of cryptocurrency experts who claim the SEC is overstepping its authority by treating airdrop-issued tokens as securities.
“Companies cannot avoid federal securities laws by structuring the unregistered offers and sales of their securities as rewards, compensation or other similar methods,” said Carolyn Welshhans, associate director of the SEC’s Enforcement Division.
Jake Chervinsky, chief of policy at the Blockchain Association, said the complaint is another example of “SEC regulation by enforcement.”
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“They say airdrops meet the ‘money investment’ pole of the Howey test, even if no one makes an investment and no money changes hands,” Chervinsky tweeted. “Just remember that SEC agreements are not a fixed law.”
However, others have said the SEC is treating Hydrogen’s bounty program as indicative of a safe investment contract, rather than an air launch.
“To be fair, the complaint seems to suggest that ‘bounties’ in which users were rewarded with tokens for a promotional action count for that clause. Not the generic airdrop, ” he answered Adam Cochran, a Yearn Finance contributor.
“It appears that the airdrop does not fall within the scope of the current Howey analysis, but only distributions through rewards and sales”, added Jeremy Sklaroff, general counsel of the Celestia network.
The SEC filed his complaint with the United States District Court in Manhattan. The complaint alleges that Hydrogen, Kane and Ostern have violated the registration, anti-fraud and market manipulation provisions of the Securities Act.
Without admitting or denying the charges, Ostern accepted a fine of $ 36,750 plus prejudicial interest of $ 5,118 and future court-determined fines in exchange for admitting no wrongdoing. Ostern also accepted bans that prevented him from participating in future offers of securities or penny stocks.
The SEC is seeking a lawsuit against Kane that includes an order to reject ill-gotten gains, civil fines, and injunctions prohibiting him from engaging in crypto stock deals or other offers, or from acting as director or executive in the future.