The US Securities and Exchange Commission (SEC) has filed charges against The Hydrogen and its market maker, Moonwalkersfor, for allegedly engaging in unregistered securities and artificially inflating token’s priceoken.
The SEC accused the two firms and thtwo execs of breaking the securities laws’ registration, anti-fraud, and market manipulation provisions. The securities watchdog also asked for permanent injunctive relief, conduct-based injunctions, disgorgement with prejudgment interest, and civil penalties, among other remedies.
Misleading Picture of Hydro’s Market Activity
According to the official press release, The Hydrogen Technology Corp., its former chief executive officer, Michael Ross Kane, and Tyler Ostern, the CEO of Moonwalkers Trading Ltd., are being targeted for violations with regards to selling tokens the SEC identified as securities into a market artificially inflated using bots.
The agency said the project’s native “Hydro” tokens were initially distributed to investors via airdrops, bounty programs, and as employee compensation.
The SEC complaint further alleges that after distributing the tokens, Kane and Hydrogen onboarded the South African firm, Moonwalkers in October 2018, to “create the false appearance of robust market activity” for the token by leveraging its customized trading software or “bot” and then sold it into that artificially inflated market for profit on Hydrogen’s behalf. According to the agency’s estimates, Hydrogen generated over $2 million as a result.
In a statement, Carolyn M. Welshhans, Associate Director of the SEC’s Enforcement Division, said,
“Companies cannot avoid the federal securities laws by structuring the unregistered offers and sales of their securities as bounties, compensation, or other such methods. As our enforcement action shows, the SEC will enforce the laws that prohibit such unregistered fund-raising schemes in order to protect investors.”
Even as Hydrogen believes the SEC’s case “wholly lacks merit” and plans to follow the legal route, the latest complaint may address the issue of the legality of airdrops and bounty campaigns.
Airdrop Tokens Can Be Securities?
An airdrop is a distribution of tokens of a particular project for free, with the main objective being – to spread awareness about it. Bounty campaigns, too, are used for promotion but are considered less expensive. The SEC’s crackdown on ICOs by classifying them as a sale of securities dates back to 2018. Since then, there has been considerable debate about the fate of airdrops and bounty campaigns.
Banking and administrative law attorney Todd Phillips stressed that the defendants in the Hydro case sold tokens in the secondary market after the airdrop. The expectation of profit as secondary market purchasers anticipated a price surge as a result of Hydrogen repeatedly touting the company’s profitability may be a crucial factor of the Howey Test.
Phillips noted that if Hydrogen had not sold the tokens after airdropping them, the Howey Test wouldn’t have been satisfied.
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