SEC Commissioner Peirce Disagrees with Portion of Wireline Settlement Regarding SAFT

Earlier today, the Securities and Exchange Commission (SEC) posted a settlement pertaining to Wireline and a SAFT offering that took place in 2018.

According to the complaint, the SEC states that:

“… between January and September 2018, Wireline, an early-stage project focused on the development of a decentralized, blockchain-based platform for “microservices” applications, conducted a multi-phase securities offering through which it raised over $16.3 million (the “Offering”). Wireline offered and sold securities in the form of investment contracts when it offered and sold digital assets through simple agreements for future tokens (“SAFTs”). 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. 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 Offering was not registered pursuant to the federal securities laws, and the offer and sale did not qualify for an exemption from the registration requirements. Wireline never distributed the digital tokens to investors.”

The complaint continues to attest that Wireline sold securities when it was not eligible for an exemption. Additionally, the company allegedly made statements that “materially misrepresented Wireline’s functionality and progress, and more than two years since it made these statements, Wireline’s platform has not launched.”

Wireline is expected to notify the 28 investors that no tokens will be forthcoming while ponying up a civil penalty of $650,000. Apparently, all the money raised by the SAFT is long gone and Wireline has pivoted its ambitions in a different direction.

Commissioner Hester Peirce, a well-known, innovation-friendly regulator, has posted her opinion on the settlement noting that she agrees with most of the SEC’s statements but differs when it comes to the actual issuance of the tokens – an event that will no longer take place.

In brief, Commissioner Peirce explained:

“While an enforcement action is appropriate given the facts in this matter, preventing the SAFT investors from directly profiting from the token launch, as the settlement requires, does not seem to be the best outcome for investors.”

Similar to some other actions by the SEC, some digital asset firms did not intend to break the law but settlements shut the door on any chance of the firm re-surfacing as a compliant operation that generated value for token holders.

Commissioner Peirce returns to our favorite legal precedent, Howey – who has taken on new life since its birthing in 1946 – explaining:

“Treating a token as a security is akin (no pun intended) to saying that if in Howey investors were permitted to take their profits in kind by taking delivery of the oranges produced by their strip of trees, those oranges would be securities and subsequent sales of these oranges by the investors to citrus-lovers would be securities transactions. You cannot make a security out of an orange by citing to the fact that the groves that produced these oranges were originally developed and sold as part of an investment contract.”

The whole thing is a fascinating legal polemic and one that continues to vex the digital asset sector (at least in the US). When is a token (digital asset) a security and when is it something else? Or both, perhaps.

You may read Commissioner Peirce’s missive here.

The complaint filed by the SEC is available below.


SEC v. Wireline 1.15.21 33-10920

 

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