The regulatory scrutiny over ICOs has led to the arrival of token “airdrops,” or free tokens in exchange for a few marketing efforts. However, a recent ruling by the SEC may end this augmenting form of generating hype for many cryptocurrency projects in the U.S.
SEC Not Impressed
A U.S. Securities and Exchange Commission filing, dated Aug. 14, unveiled digital asset startup Tomahawk has received a $30,000 fine and a lifetime ban for allegedly employing “fraudulent marketing techniques” to amp up its fundraising efforts.
A cease-and-desist order was later made public and cryptocurrency communities were quick to note a key detail of the SEC’s order: “Free” tokens were considered securities.
Tomahawk’s token issuance was said to violate Sections 5(a) and 5(c) of the Securities Act by “selling TOM tokens in the absence of a registered statement.” The court highlighted Tomahawk’s use of bounty campaigns and other marketing activities were “designed to foster the company’s economic interests” in addition to potentially causing market manipulation for its tokens.
The absence of regulations means cryptocurrency entrepreneurs have been offering airdrops and bounty campaigns immune to security laws. However, the filing states quite the contrary:
“On July 27, 2017, in response to the Commission’s DAO Report, Tomahawk published an article online titled ‘Tomahawkcoin ICO Adjusting to the SEC, by Legally Avoiding Them.’ That article incorrectly stated that Tomahawk’s ICO would be exempt from securities regulation because the Company was abandoning its plan to be quoted on the OTC market.”
Airdrops to be Illegal Soon?
Some crypto-enthusiasts ascertain the SEC’s issue is not cryptocurrencies, but the wayward process of token distribution. In this regard, Mashable reported on blockchain-based ride-sharing application Juno in 2017, describing the company’s enterprising reward of digital “shares” to riders using the platform.
Needless to say, the SEC stepped in to change the company’s core business ideals, putting in a formal request to shift from a digital share-rewards system to a cash-based incentive process.
Moving forward–now that token issuers and ICOs are viewed as taboo by the U.S. lawmakers–it is expected that airdrops and bounty campaigns face comparable legal action and certain levels of scrutiny.
The airdrop case weakens when blockchain entrepreneurs themselves describe the process in a satirical manner. Matthew Roszak of Bloq said:
“In certain ways, people are getting free lottery tickets. There will be a tsunami of airdrops this year.”
A glance at airdrop collation site Airdrops.io provides evidence to Roszak’s words: There are thousands of airdrops and bounty programs listed.
Cover Photo by Inma Ibáñez on Unsplash
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