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Block.one SEC Settlement Matters

October 18, 2019

In recent articles, we’ve touched on initial coin offerings (ICOs). We’ve seen how the SEC has had to reprimand certain companies due to various ICO missteps made by digital asset companies. For instance, we recently looked at the case of Munchee, Inc., and discussed the specifics of the federal crackdown on Munchee’s proprietary digital coin. Now, ICOs are springing up all the time. In this post, we’ll discuss the specifics of a recent ICO crackdown: the case of Block.one. Block.one is among the most significant ICOs, in part because of the sheer size of the Block.one SEC settlement. In this post, we’ll take a look at the details of this important case.

Basic Overview of the Block.one SEC Settlement

Block.one is a software company registered in the Cayman Islands, but has the majority of its officers in Hong Kong. Block.one launched an ICO back in 2017. Capitalizing on the hype surrounding cryptocurrency, block.one managed to sell approximately 900 million of its digital tokens through its ICO in 2017 and 2018. The success of the ICO led the Securities and Exchange Commission, or SEC, to scrutinize block.one’s activities, and eventually a suit was initiated. The SEC made two charges in the suit: (1) Block.one failed to register its ICO; and (2) Block.one failed to make certain mandatory disclosures to investors. Notably, the SEC did not make any allegation of fraud against block.one. This distinguishes this case from other prominent SEC investigations of ICOs.

$24 Million Settlement

Although the Block.one SEC settlement was for $24 million, the company neither admitted nor denied the SEC’s allegations. Block.one issued a public statement on the case in which it suggested that there are still many uncertainties surrounding the industry they operate. Specifically regarding digital currency regulation, and that these uncertainties make compliance a difficult matter. The SEC disagreed with this position, insisting that the registration requirements pertaining to cryptocurrency are clear. Under the terms of the Block.one SEC settlement, Block.one can continue to make private investments in U.S.-based companies. This is a privilege which could have been lost by the SEC as a result of Block.one’s activities. But the SEC waived the disqualification in order to encourage more foreign investment in the U.S. economy.

Block.one raised money from investors from other places outside of the U.S. But, the case still came under scrutiny by the SEC once the SEC learned that a sizable portion of the investors that participated in Block.one are U.S. investors. Block.one stated that it actually made efforts to prevent U.S. investors from acquiring digital tokens in its ICO. But these efforts failed and many U.S. investors acquired tokens.

Crypto Companies Need Legal Counsel

Even though Block.one is not a U.S. based company, this misstep ended up costing it a huge amount of money. The Block.one SEC settlement was $24 million; certainly not a small sum. Once Block.one learned that U.S. investors purchased tokens, Block.one probably should have contacted a U.S. tax attorney. With such counsel, block.one may have been able to at least mitigate the massive cost it ultimately paid. In all likelihood, Block.one was still operating under the impression that cryptocurrencies were beyond the scope of the U.S. government. This conclusion is backed by Block.one’s own public statement in reference to the case. But we know that this most certainly isn’t true. Companies which plan to launch an ICO in the future need to understand all of the applicable tax laws and SEC regulations, otherwise they may be slapped with a settlement fine like the one seen here.

Contact MC&C Today for Additional Information

At Mackay, Caswell & Callahan., P.C., we understand the tax laws and regulations which apply to cryptocurrencies and initial coin offerings. We work to stay on the cutting-edge and understand the latest developments in the tax world, such as the Block.one SEC settlement discussed here. If you have cryptocurrency tax debt, we can help. We resolve federal tax debt, New York state income tax debt, and so forth. We routinely advised clients on how they can best resolve their tax debt and begin the process of rebuilding their financial lives. If you’d like to learn more, contact one of our top New York tax attorneys for additional information.

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