On November 8, 2018, the Securities and Exchange Commission (“SEC”) announced that it settled charges against Zachary Coburn, founder of EtherDelta, a digital token trading platform, for operating an unregistered national securities exchange. This is the SEC’s first enforcement action based on findings that a digital token trading platform operated as an unregistered national securities exchange.

The SEC’s Order (“Order”) finds that during an 18-month period, EtherDelta’s users executed more than 3.6 million orders for “ERC20” tokens, including tokens considered to be “securities” under the federal securities laws. EtherDelta, an online platform for secondary market trading of “ERC20” tokens, a type of blockchain-based token commonly issued in initial coin offerings, brought together buyers and sellers of digital asset securities through the combined use of an order book, a website that displayed orders, and a “smart contract” run on the Ethereum blockchain. The “smart contracts” were coded to validate the order messages, confirm the terms and conditions of orders, execute paired orders and direct the distributed ledger to be updated to reflect a trade.

The Order does not make a determination on which ERC20 token(s) it considered to be a “security.” Instead, the Order states that buy and sell orders on EtherDelta during the relevant period were “in ERC20 tokens that included securities” as defined by the US securities laws. Further, the Order finds that 92% of the trades during the relevant period were traded after the SEC issued it’s “DAO Report.” In the DAO Report, the SEC advised that a platform that offers trading of digital assets that are “securities” and operates as an “exchange,” must comply with SEC requirements to register as an exchange or operate pursuant to an exemption. Our blog post on the DAO Report can be accessed here.

The Order also indicates that the SEC considered Coburn’s cooperation during the investigation as a factor in not imposing a greater penalty. Coburn agreed to testify in any related enforcement action. The SEC’s Press Release announcing this enforcement action indicates the investigation is “continuing.”

Coburn agreed to pay nearly $388,000 in disgorgement, prejudgment interest, and civil monetary penalty.

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