SEC ordered Blockchain of Things to register its token and open investor claims

The U.S. Securities and Exchange Commission on December 18, 2019 accepted a settlement with Blockchain of Things Inc. over an unregistered initial coin offering that raised approximately $13 million. The order required the New York blockchain company to stop violating the registration provisions of the Securities Act, pay a $250,000 civil penalty, register its BCOT token as a class of securities and create a process for qualifying purchasers to seek repayment.

The development mattered beyond one small issuer. The SEC was again showing how it could treat a token promoted for use in a future network as a security when buyers depended on the issuer to build that network and increase the token’s value. At the same time, the settlement offered a compliance route—registration, periodic disclosure and purchaser claims—rather than ordering the project simply to disappear.

What the SEC found

Blockchain of Things described Catenis as a services layer encoded into the Bitcoin blockchain. Its materials envisioned third-party applications for secure messaging, data logging, digital-asset creation and transfers. But the SEC found that Catenis remained in beta during the offering, with no developed ecosystem of third-party applications and little operating revenue.

BCOT began its presale on December 4, 2017. The SEC said the combined presale and public sale collected approximately $13 million from approximately 1,380 people. Funds were received largely in bitcoin and also in U.S. dollars; the agency’s dollar figure used exchange rates in effect during the offering, so it was an approximate historical conversion rather than a December 18, 2019 valuation. BCOT distributed the tokens on March 13–15, 2019.

The offering documents said tokens could be converted into credits for Catenis services. Purchasers also signed contracts stating that they were not buying for appreciation, investment or speculation. The SEC nevertheless focused on the transaction’s economic features: token prices rose as sales progressed, the company controlled most of the planned supply, the tokens were transferable without restriction, and the promised ecosystem depended substantially on BCOT’s work. On that record, the Commission found that buyers reasonably could expect profits from the company’s efforts and that the tokens were securities under the Howey framework.

A settlement built around disclosure and claims

The order directed BCOT to file a Form 10 within 120 days to register the tokens under Section 12(g) of the Securities Exchange Act of 1934. Registration would bring periodic reporting obligations. BCOT also had to notify people and entities that bought tokens from the company on or before July 31, 2018 of potential claims under Section 12(a) of the Securities Act.

A qualifying claimant could seek the consideration paid plus interest, less any income received, upon tender of the token, or seek damages if the token was no longer owned. The settlement did not guarantee that every purchaser would be paid automatically: claims had to be submitted, documented and evaluated under the process specified in the order. BCOT was required to report its handling of claims to SEC staff.

The $250,000 penalty was divided into four installments due within 30, 60, 90 and 120 days. The Commission said it considered BCOT’s remedial acts and cooperation when deciding not to impose a larger civil penalty.

What was—and was not—decided

The December 18, 2019 action was a settled administrative order, not a court judgment after trial. BCOT consented without admitting or denying the SEC’s findings, apart from admitting the agency’s jurisdiction and the proceeding’s subject matter. The order found registration violations under Sections 5(a) and 5(c); it did not charge fraud.

For token issuers at the end of 2019, the practical message was that calling a token a future utility did not settle its legal status. Where an unfinished platform, managed supply and issuer-led development supported an expectation of profit, the SEC was prepared to apply securities-registration rules—and to make disclosure and purchaser restitution central terms of settlement.