Fraudulent Bounty Program Provides a Warning to Every ICO Promoter
Last month the Securities and Exchange Commission (SEC) obtained a permanent officer-and-director and penny stock bar against Tomahawk Exploration LLC founder, David T. Laurance, for perpetrating a fraudulent initial coin offering. (SEC Press Release). On its face, the decision shows the SEC merely enforcing its previous statements that anything resembling a security will be labeled as such and regulated under the Securities Act. The ruling, however, extends the umbrella of SEC oversight to explicitly include “Bounty Programs”—a mainstay practice for many initial offerings. (FundYourseflNow, Hackernoon). Understanding bounty programs is critical to understanding the broader impact of the SEC’s order on the Cryptocurrency ecosystem.
Bounty programs originated in the digital gaming world where “free items or other perks have traditionally been offered to gamers for their help in game development, usually in the form of bug hunting.” (Steve Walters, CoinBureau). Ventures seeking to raise money through ICO’s have adopted bounty programs as “an efficient and cheap way to spread the word about the ICO by outsourcing marketing to regular people.” (Hira Saeed, CoinSchedule). Ventures reward tokens for the new ICO to “Bounty Hunters” for completing specified tasks which help promote the ICO. The "bounty hunters" gain tokens by making posts on social media (e.g. YouTube, Twitter, and Facebook), while developers receive tokens as payment for coding (Investopedia). These programs are classified as either pre-ICO bounty programs or post-ICO programs respectively. Pre-ICO programs generally “focus on social media platforms, and are designed to create awareness about the project and the upcoming ICO.” (Steve Walters, CoinBureau). Post-ICO programs usually involve either translations campaigns, which help broaden the global reach of the project by making documents available in foreign languages, or bug reporting programs. (Id.)
Given how important and commonplace bounty programs are in ICO’s, the SEC’s decision to pursue an ICO which, although fraudulent, failed to raise money shows the agency’s commitment to enforcing its regulatory oversight of these assets. (SEC Press Release). This order is consistent with the SEC’s ongoing effort to regulate a class of assets which are securities—in all but name—and to protect potential investors. The SEC’s order gives a clear warning to main street investors: “be alert to the risk of old-school frauds, like oil and gas schemes, masquerading as innovative blockchain-based ICOs.” (Id.)
Beyond the warning to investors and potential fraudsters, there are two key takeaways from the SEC’s order. First, consistent with previous SEC statements, simply using words such as “token” or “decentralized network” in a white paper does not magically transform the coin from a security into something else beyond the reach of the SEC. Second, granting tokens as part of a pre or post-ICO “bounty program” qualifies as issuing securities, even if the ICO is never completed. Therefore, promoters looking to raise money through an ICO must be aware of the SEC’s position as ICO’s continue to move into the regulatory mainstream.