The Securities and Exchange Commission halted the registration of two digital securities offered by American CryptoFed because information included in its registration documents was “deficient and misleading,” the regulator said Wednesday.
American CryptoFed is a Wyoming-based organization whose mission is “to create and maintain a monetary system with zero inflation, zero deflation and zero transaction costs,” according to an SEC filing submitted in September.
The organization says its inflation-protected Ducat token will be controlled by an algorithm that creates and destroys Ducats as needed to prevent any inflation or deflation in the currency, as measured by the personal consumption expenditure index issued by the Commerce Department.
In its filing seeking to register the Ducat and an accompanying token, the Locke, as securities, CryptoFed said it wanted to register them as “utility tokens” and “not as securities,” even though the SEC does not register utility tokens and oversees the offering of securities as defined by federal law.
The SEC said that American CryptoFed also failed to report required information about the two tokens and about American CryptoFed’s “business, management, and financial condition, including audited financial statements.”
Marian Orr, American CryptoFed’s chief executive officer, told MarketWatch that she learned about the SEC’s decision through the press before the SEC provider her formal notice Wednesday morning. “I was disappointed and found it poor governance by the federal government that I learned about this action via the press, and received formal notice” later Wednesday morning from the SEC, she said in an email.
In an Oct. 7 letter addressed to SEC Commissioner Hester Pierce, Orr said that American CryptoFed does not believe that Ducat and Locke are securities, but that it proactively filed registration documents, “just in case that the SEC may classify them as securities.”
Orr also explained in the initial filing and subsequent correspondence with the SEC that the organization did not include financial statements in its filing because “CryptoFed does not have and will never have any revenue or costs.” She added that “CryptoFed’s zero cost operations can be achieved by using its own native tokens, just as the bitcoin blockchain
blockchain have both demonstrated by incentivizing their miners with their own native tokens.”
“Issuers attempting to raise money from the public must provide the information necessary for investors to make informed decisions,” said Kristina Littman, chief of the SEC Enforcement Division’s Cyber Unit, in a press release. “We allege American CryptoFed made materially misleading statements and failed to provide legally required information in its registration form.”
The SEC’s order initiates an administrative proceeding that will determine “whether it is necessary and appropriate for the protection of investors to deny or suspend the effective date of the registration” of Ducat and Locke, the regulator said.
SEC Chairman Gary Gensler has encouraged cryptocurrency issuers to “come in and talk to us” about how digital assets can be issued to the public in accordance with federal securities laws. Gensler has also said that few crypto issuers have decided to engage the regulator.
INX Ltd., which operates trading platforms for digital assets, became the first issuer of a crypto token to register its offerings with the SEC earlier this year.