The United States Securities and Exchange Commission, or SEC, has announced the filing of charges against Hydrogen Technology Corporation and its broker Moonwalkers Trading Limited in connection with the alleged perpetration of a scheme to manipulate the trading volume and price of Hydro tokens.
In a September 28 announcement, The SEC said former Hydrogen CEO Michael Ross Kane hired Moonwalkers and its CEO Tyler Ostern “to create the false appearance of robust market activity” following the distribution of Hydro tokens via an airdrop, rewards programs and direct sales in 2018. Kane then had Moonwalkers sell the tokens on the “artificially inflated market” for more than $2 million in profit on behalf of Hydrogen.
“As we allege, the defendants profited from their manipulation by creating a misleading picture of Hydro’s market activity,” said Joseph Sansone, head of the SEC’s Division of Enforcement’s market abuse unit. “The SEC is committed to ensuring fair markets for all types of securities and will continue to expose and hold accountable market manipulators.”
According to the SEC, Kane’s actions, Ostern and the companies constituted a manipulation of the cryptocurrency market, violating the provisions of United States securities laws. The regulator reported that Ostern had agreed to pay more than $40,000 in restitution and interest, subject to approval by a federal court in New York “with civil money penalties to be determined at a later date.” The SEC lawsuit sought similar action against Kane, as well as for the former CEO to be disqualified from holding officer and director positions.
Many in the cryptocurrency space criticized the SEC complaint as an example of regulation by law enforcement, in this case claiming that the regulator was extending airdrops to its purview.
“They say airdrops don’t meet the Howey test of ‘investing money,’ even if no one makes an investment and no money changes hands,” said Jake Chervinsky, head of policy at the cryptocurrency advocacy group Blockchain Association. “The SEC talks a lot about airdrops, but then only seems to argue that distributions through direct sales, rewards programs, and employee compensation are securities transactions.”
Others suggested that while the SEC’s actions may have apparently been counterproductive to the course of enforcement in the crypto sector, they may not necessarily have been aimed at token airdrops:
To be fair, the complaint seems to suggest that the “bounties” where users were rewarded with tokens for a promotional action count for that clause. Not the generic airdrop.
I still don’t think that it should merit an “investment of money” but there is arguably more precedent.
— Adam Cochran (adamscochran.eth) (@adamscochran) September 28, 2022
To be fair, the complaint seems to suggest that “rewards” where users were rewarded with tokens for a promotional action count towards that clause. Not the generic airdrops.
I still think that shouldn’t be worth an “investment of money”, but arguably there is more precedent.
Although the SEC has taken many enforcement actions against initial coin offerings between crypto firms, the regulator’s stance on the role of airdrops in alleged token schemes is unclear.. Commissioner Hester Peirce said in a February 2020 speech that the SEC had hinted that a token airdrop “could constitute a securities offering.”
“Since the SEC has found that some tokens may be securities, if you are thinking of using an airdrop distribution of tokens, keep in mind that even giving away tokens is not necessarily free from scrutiny under securities law,” said the director of investigation by Coin Center crypto lobby group Peter Van Valkenburgh in a 2017 blog.
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the full amount invested may be lost. The services or products offered are not aimed at or accessible to investors in Spain.