SEC: initial coin offering of Calata’s Krops illegal

Joseph Calata. FILE PHOTO/RENE GUIDOTE

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 produce led by controversial 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) to 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 are also stopped from selling or offering securities in the form of Krops tokens and/or Krop Coins or any others 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 company 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 includes 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.

According to the SEC, Black Cell has been selling tokens at a “pre-sale” 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.

As of Friday night, Krops’ website continued to be operational, now offering tokens at a 10 percent discount. It reported that 3.89 million tokens had been sold or 61 percent of pre-sale tokens.

“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. had been delisted from the Philippine Stock Exchange last December due to multiple violation 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, a test created by the US Supreme Court for determining whether certain transactions qualify as “investment contracts.”

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

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.

On the argument as to whether the sale was in the Philippines, the SEC noted that the Krops website was accessible in the Philippines, its officers were mostly Filipinos with local addresses, Black Cell and Black Sand were domestic corporations, Krops’ main website domain was applied for by a Filipino officer of Krops, Krops addresses and telephone numbers were based in the Philippines and the selling efforts were being performed by agents, including information providers, with addresses in the Philippines.

“Most telling of all, Joseph Calata publicly announced on the occasion of delisting from PSE that instead of stocks he would offer cryptocurrency instead to his shareholders and majority, if not all of the shareholders are Filipinos residing in the Philippines,” the SEC said.