The U.S. Securities and Exchange Commission (“SEC”) entered an order on Dec. 15, 2020 with Wireline, Inc., related to the company’s unregistered offering of securities using a simple agreement for future tokens (“SAFT”). Like Omar from the highly regarded HBO show, The Wire, who warned other characters, “You got me confused with a man who repeats himself,” the FinTech community appears to have the SEC confused with an agency that wants to repeat itself.
Wireline is a FinTech company that raised more than $16 million from investors using a SAFT to fund the development of a platform for the sale of components of larger software projects. Wireline represented to investors that the funds would be used to develop the Wireline microservices platform and that the tokens would be used as the means of exchange between software developers and end-users on Wireline’s marketplace. The SAFTs provided that upon the public release of Wireline’s marketplace, Wireline would distribute those digital tokens to investors, who were counterparties to the SAFTs. As part of the company’s efforts to raise funds from investors, Wireline distributed marketing materials that materially misrepresented the functionality of Wireline's platform and the timing of the token distribution. No tokens were ever distributed pursuant to the SAFTs.
The SEC concluded Wireline made materially false and misleading statements connection with the offer and sale of digital asset securities through SAFTs that were not registered pursuant to the federal securities laws and did not qualify for an exemption. The SEC found Wireline violated the antifraud provisions of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and the registration provisions of Sections 5(a) and 5(c) of the Securities Act. Wireline agreed to a cease and desist order, to pay a penalty of $650,000 that will be distributed to investors, and to notify investors that tokens will not be distributed pursuant to the SAFTs.
The Wireline order is the most recent SEC action against a FinTech company that used the discredited SAFT model to raise capital with the mistaken belief that tokens associated with the SAFT would not be deemed securities.(1) The authors anticipate the Wireline order will not be the last SEC action against a FinTech firm that used as SAFT to raise capital and the SEC, like Omar will have to continue to repeat its views that tokens issued using a SAFT are illegally offered securities.
(1) See e.g., ShipChain, Inc., (Dec. 21, 2020) (SEC filed a settled cease-and-desist proceeding against ShipChain for conducting an unregistered initial coin offering (“ICO”) of digital tokens using a SAFT); Unikrn, Inc., (Sep. 15, 2020) (SEC filed a settled cease-and-desist proceeding against Unikrn, an operator of an online eSports gaming and gambling platform for conducting an unregistered ICO of digital asset securities using a SAFT); SEC v. Telegram Group Inc., et al., (June 26, 2020) (Telegram agreed to resolve charges the company's unregistered offering of digital tokens using a SAFT violated the securities laws, to return more than $1.2 billion to investors, and to pay a civil penalty of $18.5 million); SEC v. Manor, et al., (Jan. 17, 2020) (SEC filed a complaint against Manor, his business associate, and CG Blockchain Inc. and BCT Inc. SEZC, for allegedly raising over $30 million from hundreds of investors in a fraudulent ICO that used SAFT); SEC v. Eyal, et al., (Dec. 11, 2019) (SEC filed a complaint against a digital-asset entrepreneur and his company for allegedly defrauding investors in an ICO using a SAFT that raised more than $42 million from hundreds of investors); SEC v. Kik Interactive Inc., (June 4, 2019) (SEC filed a complaint against an ICO issuer that used a SAFT to raise $100 million in an alleged unregistered securities offering that did not qualify for an exemption).