Motion to lift ban on Krops’ coin offering denied

controversial businessman Joseph Calata

The Securities and Exchange Commission (SEC) has denied a petition from the group of controversial businessman Joseph Calata to lift the ban on the local initial coin offering (ICO) of Krops, an online marketplace for farm produce.

In an eight-page resolution dated March 2, the SEC en banc declared as “permanent” its cease-and-desist order (CDO) against Krops, Black Cell Technology Inc., Black Sands Capital Inc. and Hong Kong-registered Black Cell Technology Ltd. in relation to Krops’ coin offering.

“The Krops Tokens and/or KropCoins are unregistered securities that are being offered and/or sold within the Philippines through the joint efforts of respondents,” the SEC said.

ICO or initial coin offering is the first sale and issuance of a new virtual currency to the public, usually for the purpose of raising capital for start-up companies or funding independent projects.

In declaring Krops’ ICO as illegal, the SEC argued that the offering had satisfied the description of “securities” in Section 3.1 of the Securities Regulation Code (SRC) as well as the four elements of the Howey Test, a test created by the US Supreme Court for determining whether certain transactions qualify as “investment contracts.”

In its motion to lift the CDO, Calata’s group argued that Krops’ offering did not satisfy one of the four elements of the Howey Test, referring to the increase in value coming from the efforts of others.

The SEC, however, put more weight to the argument of its enforcement, investigation and prosecution department (EIPD) that “market forces independent of the owner, i.e. the efforts of others, are primarily responsible for changes in the value of the Krop Token and/or KropCoins.”

“The Krop Tokens and/or Krop Coins will increase in value if the agricultural hub (Krops) succeeds due to the efforts of Black Cell HK and market participants. Respondents admit this when they stated that: The market forces that control the value of the commodities being traded on the Krops platform may also dictate the value of the KropCoins,” the SEC ruling said.

While the offering targets a global audience, the SEC noted that “public offering” as stated in rule 3.1.17 of the 2015 implementing rules of the SRC, may be made via “announcement on xxx electronic communications (or) information technology.”

“In this light, we interpret internet access by a buyer in the Philippines to the offer/sale of unregistered securities which may have been initiated abroad as an offer/sale within the Philippines,” the SEC said.

The SEC added that the respondents were “attempting to evade an obligation to register with the Commission by claiming that the ICO is the sole act of Black Cell HK. Piercing the corporate veil is thus proper and the respondents may all be held liable,” it added.