SEC stops cryptocurrency offering

The Securities and Exchange Commission (SEC) has declared as “illegal” an initial coin offering (ICO) or sale of tokens being undertaken by Krops, an online marketplace for farm products led by controversial young businessman Joseph Calata.

Citing an urgent need to protect the investing public from the sale of unregistered and “highly speculative” securities, the SEC served on Friday a cease-and-desist order (CDO) on four Calata-led companies—Krops, Black Cell Technology Inc., Black Sands Capital Inc. and Black Cell Technology Ltd.

The directors, officers, representatives, salesmen, agents and any and all conduit persons of these companies were prohibited from engaging in selling or offering securities in the form of Krops tokens and Krop coins or any other of same nature until the requisite registration statement is duly filed with and approved by the SEC. They were also directed to cease their “internet presence” relating to these investment activities.

In a 10-page order, the SEC said the Securities Regulation Code was explicit that “securities should be registered before being offered or sold to the public in order to protect the investing public from worthless securities, which if unchecked, is likely to cause grave and irreparable damage and injury to the investors and public in general.”

Krops, which is registered in Hong Kong, is a start-up company and mobile app owned by Black Cell Technology, a firm based in Pulilan, Bulacan.

“What is involved here is an ICO, which is essentially the same as a public offering of securities. A public offering of securities is subject to strict disclosure rules, which include the disclosure of pending cases against the founder/offeror/promoter, which would put the investing public on guard,” the SEC said.

ICOs, also known as token sales or coin sales, typically involve the creation of digital tokens—using distributed ledger technology—and their sale to investors by auction or through subscription, in return for a cryptocurrency such as bitcoin or ether. These offerings are not standardized and their legal and regulatory status is likely to depend on the circumstances of the individual ICO, the SEC noted.

In this case, Black Cell has been selling tokens at a “presale” price of $1 with a 30-percent discount or a token price of 0.00105 ETH (ether) equivalent to $0.70 per token. More than two million tokens have been already sold out of 6.4 million tokens being offered.

“The Commission, mandated to protect investors, must fulfill this duty in the case of Krops. On that note, the investing public should be wary of an ICO where the issuer has pending criminal and administrative cases e.g. for violation of disclosure rules imposed by the Commission,” it noted.

Calata’s other company, Calata Corp., was delisted from the Philippine Stock Exchange last December due to multiple violations of disclosure rules alongside the trading of securities by a director during the prohibited period. The SEC itself separately filed criminal charges last November against Calata and other directors and officers for alleged stock trading fraud.

The SEC ruled that the ICO of Krops satisfied all of the four elements of the Howey test, which was created by the US Supreme Court to determine whether certain transactions qualify as “investment contracts.”

It is an investment of money; There is an expectation of profits from the investment; The investment of money is in a common enterprise, and any profit comes from the efforts of a promoter or third party.

First and foremost, the SEC noted that Krops was a technology-based start-up company, which was an unincorporated profit-making venture.

“Investors are led to expect that their investment in Krops Tokens and/or KropCoins will appreciate,” the SEC said.

Furthermore, the SEC noted that the increase in the value of the Krops tokens does not depend primarily on the effort of the investor, who need not participate in the agricultural marketplace.

The SEC added that Black Cell did not possess the requisite license to sell or offer to sell securities to the public. Furthermore, it is not licensed to employ brokers, dealers, salesmen or associated persons.