SEC charges token trading platform founder for operating unregistered securities exchange

A settlement recently announced by the Securities and Exchange Commission (SEC) highlights the risk of personal liability for individuals who develop and operate digital asset businesses without complying with securities laws. In this case, Zachary Coburn, the founder of the EtherDelta token trading platform, agreed to pay nearly $400,000 to settle charges alleging that EtherDelta was an unregistered securities exchange. The settlement underscores the SEC’s continuing focus on enforcement of securities laws in the digital assets space.

Background and enforcement action

Coburn launched EtherDelta, a digital token trading platform for trading digital assets called Ether and ERC20 tokens, in July 2016.

A year after the launch, the SEC published an investigative report (the “DAO Report”) stating the SEC’s view that offering and selling digital assets by virtual organizations was subject to federal securities laws. In particular, the report said that a platform for trading digital assets that were securities and that operated as an exchange had to register or be exempt from registration.

Between its launch in July 2016 and December 2017, when Coburn sold EtherDelta to non-U.S. buyers, there were more than 3.6 million orders traded on EtherDelta. Of these, apparently 92% occurred following the DAO Report and included trades of tokens that were securities. The SEC commenced proceedings against Coburn personally for causing EtherDelta to operate as an unregistered national securities exchange. The charges were settled and Coburn consented to an order that he pay $300,000 in disgorgement, $13,000 in prejudgment interest, and a $75,000 penalty.

Discussion

  • The charges relating to EtherDelta follow multiple warnings by the SEC and other regulators regarding digital asset trading platforms. In addition to the warning in the DAO Report (which we previously discussed here), the SEC issued a statement in March 2018 warning of potentially unlawful platforms for trading digital assets. Likewise, the Canadian securities administrators have noted that such platforms may need to comply with Canadian securities laws if they trade digital assets that are securities.
  • The settlement once again confirms that the SEC is looking beyond initial coin offerings when enforcing securities laws in the digital asset space. In September 2018, the SEC announced a settlement of charges that a self-described “ICO Superstore” and its owners were acting as unregistered broker-dealers by selling digital tokens. The SEC also announced a settlement of charges for operating an unregistered investment company by raising capital to invest in digital assets.
  • The SEC appears to be seeking progressively more serious civil penalties under settlements. A December 2017 settlement relating to the Munchee initial coin offering did not require any monetary payment, but since then settlements have included payments of $470,000 and $200,000, in the case of the two September 2018 settlements, and nearly $400,000 in the case of EtherDelta. As the SEC pursued the principal of EtherDelta personally, the settlement demonstrates the personal risks to individuals who operate digital asset businesses without proper consideration of applicable securities laws.
  • The EtherDelta case represents the continuing evolution of regulators’ enforcement strategy in the digital assets space. As the SEC reportedly has “dozens” of open investigations into digital asset businesses, this settlement will almost certainly not be the last.
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Editors

Lawrence E. Ritchie

Partner, Litigation

Alexander Cobb

Partner, Litigation

Shawn Irving

Partner, Litigation

Kevin O’Brien

Partner, Litigation

Lauren Tomasich

Partner, Litigation

Lia Bruschetta

Associate, Litigation