What the SEC Thinks of ICO Bounty Programs

A few months ago, I wrote an article discussing whether airdrops may violate the U.S. securities laws. At the time the article was published, the SEC had not yet spoken out about airdrops nor had penalized any blockchain company for giving away free tokens.

In the past, the SEC has brought enforcement actions against companies that gave away stock for free when the primary purpose was to further their own economic interests, rather than for reasons of pure generosity. Recently, the SEC applied the same principles in its enforcement action against Tomahawk Exploration LLC (“Tomahawk”), charging Tomahawk, in part, with violating the federal securities laws by distributing “free” tokens through its bounty program.

Bounty Programs Are Not a Way to “Avoid” the SEC

Tomahawk initially decided to raise money by selling TOM tokens. Shortly after promoting its initial coin offering (“ICO”), the SEC published the DAO Report, which warned issuers of blockchain tokens that if they offered and sold tokens that are securities, they must register the offering or find an exemption to registration.

In response, Tomahawk decided to abandon their ICO and decided to instead give away their tokens through a bounty program. In connection to this effort, Tomahawk published an article titled, “Tomahawkcoin ICO Adjusting to the SEC, by Legally Avoiding Them” to explain their strategy. As shown in the SEC’s Cease-and-Desist Order against Tomahawk, they were not successful at “avoiding” the SEC by giving away tokens through their bounty program.

Even if You Give Away Tokens for Free, You May Still Be Subject to U.S. Securities Laws

In Tomahawk’s updated distribution scheme, instead of selling TOM tokens for money, Tomahawk gave TOM tokens to people who completed certain tasks, such as asking token trading platforms to list TOM tokens, promoting TOM tokens on social media, and creating promotional materials for Tomahawk. Although Tomahawk did not raise a single penny selling TOM tokens, the SEC found that Tomahawk violated the U.S. securities laws because TOM tokens are securities, which were offered and sold without registration or an exemption from registration.

Before Offering Your Tokens to Anyone, Determine Whether Your Tokens are Securities

In finding that Tomahawk violated the provision of the securities laws that require that an offer or sale of a security to be registered or exempt from registration, the SEC first analyzed whether TOM tokens are securities.

Like in the cases involving token sales before it, the SEC analyzed whether TOM tokens are securities under the Howey test. Applying the Howey test, the SEC determined that TOM tokens are securities. They also determined that the TOM tokens were securities under other tests.

Because TOM tokens are securities, Tomahawk was required to either register the offer and sale of the TOM tokens or find an exemption from registration before advertising the TOM tokens for sale or making such a sale.

An Offer of Securities Does Not Require Solicitation For Money

Typically, a company “offers” securities by advertising them for sale at a certain price. For example, if a company advertises that it is selling shares of its company for $1 per share, that would be an offer of a security. Likewise, if a company advertises tokens in an ICO in exchange for ether and promises of making the buyer lots of money, that would also be an offer of a security.

However, the SEC’s interpretation of the meaning of an “offer” of a security goes beyond simply soliciting potential investors for money. The SEC found that Tomahawk’s bounty program constituted an offer of securities because it involved “an attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.” This means that any attempt to distribute a security in exchange for something of value, is an offer.

In Tomahawk’s case, it made an offer when it advertised its bounty program, which provided the opportunity to earn TOM tokens by engaging in various activities to promote the TOM tokens, including asking token platforms to list the tokens, promoting the tokens on social media and creating other promotional materials.

A Sale of a Security Does Not Require an Exchange of Money

Similar to the definition of an “offer” of securities, which does not require solicitation for money, the “sale” of a security does not require any exchange of money. Rather, a “sale” of a security occurs whenever a security is given in exchange for value. Anything of value will suffice. It can be as small as a Facebook shoutout if it was given in exchange for a security.

The SEC deemed the distribution of TOM tokens a sale of securities because Tomahawk gave away the tokens, “for value.” Even though Tomahawk did not receive any money in exchange for their TOM tokens, the distribution of tokens under its bounty program constituted a sale because Tomahawk received value in exchange for the distributions, including promoting the ICO and creating a public market for the tokens.

Even if You Raise No Money, You Can Face Severe Consequences for Violating Securities Laws

As a consequence for violating the federal securities laws, the SEC barred Tomahawk’s CEO from serving as an officer or director of a public company or participating in a penny stock offering ever again. It also fined him $30,000 even though Tomahawk didn’t raise any money and its CEO’s did not have the funds to pay that fine.

Given this, if you are looking to airdrop your tokens or create a bounty program, you have to determine whether your tokens are securities. If so, you must comply with federal securities laws.


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This article is provided for informational purposes only and should not be construed as legal advice. Read our disclaimer here.

#SEC #ICO #airdrop #securities