Is There A Unicorn Among ICO Issuers?

The United States Securities and Exchange Commission ("SEC") has indicated that nearly all initial coin offering ("ICO") filings they have seen are securities offerings. Based on this expansive view, it may be more likely to find a Unicorn than an ICO that is not a securities offering. Ironically, a recent lawsuit was filed against Unikrn, a block-chain based betting platform, primarily focused on esports betting.

In the securities class action, the Plaintiff alleges that UnikoinGold Tokens ("UKG Tokens") were sold in an ICO and continue to be sold to the general public through cryptocurrency exchanges. The Plaintiff further alleges that Defendants attempted to sidestep the securities laws by calling the token a "utility token" rather than a security and that the  tokens did not have any functionality at the time of the ICO. However, Plaintiff acknowledges that the company promoted the tokens as being useful with their existing platform. In 2016, Unikrn created the "Unikoin" token (a virtual currency) to allow users to bet on esports and win prizes in markets where Unikrn was not yet licensed to conduct real-money wagering. After turning over a quarter of a billion Unikoins, Unikrn decided to move its Unikoin tokens onto a blockchain by creating the UKG Token, described here in its White Paper entitled  UnikoinGold: A Decentralized Esports Gaming Token ("UnikoinGold Whitepaper"), UNIKRN (Sept. 25, 2017). Unlike some ICOs that launch prior to the existence of a functioning platform, here a platform was already built and in use and one could argue that the token has "utility." This is a potentially helpful fact, but is not dispositive.

Also, unlike some other ICOs, Defendant did not completely ignore securities laws. Rather, as Plaintiff acknowledges in the complaint, Defendants filed an SEC Form D Notice of Exempt Offering of Securities with the SEC ("Form D Notice") for the sale of unregistered securities to accredited investors residing in the United States. The Form D Notice describes the securities offered as "Simple Agreement for Future Tokens" (also known as a "SAFT"). Plaintiff goes on to assert that although the exemption under which Defendants filed is limited to sales to accredited investors, UKG Tokens were offered to the general public in the ICO. Allegedly, Unikrn did not verify the accreditation of the investors. The legal issues with SAFTs have been the subject of much debate.

If this case moves forward, it is possible we will get further jurisprudence on when a token offering is considered a securities offering and what impact, if any, the existence of any operating platform for the token has on the analysis. However, at the end of the day, all of the facts and circumstances need to be considered.

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