On November 8, 2018, the SEC announced the conclusion of an investigation into the digital token trading platform EtherDelta. According to the financial authority, EtherDelta failed to register as a national securities exchange despite offering the buying and selling of security-like assets on a secondary market.
Disgorged, Penalized, and Prejudgement Interest
Founder Zachary Coburn neither affirmed nor denied the claims and has settled for a $75,000 penalty, $300,000 disgorgement, and $13,000 in prejudgment interest. Coburn’s cooperation in the matter was taken into consideration before the penalties were given. The SEC identified EtherDelta’s unregistered exchange of securities as the principal offense.
The platform has reportedly relayed over 3.6 million orders since the platform’s inception in July 2016 and December 2017. The majority of these exchanges included the buying and selling of ERC20 tokens, which underpin the makeup of the majority of tokens used in initial coin offerings (ICOs). Other tokens, such as DAO tokens and what the SEC considers digital securities, were also traded on the platform.
Between the date of the notice and the launch of EtherDelta, the SEC also released their DAO Report on July 25, 2017, which formalized their approach in cracking down on the crypto sector. The report set a precedent for how the SEC would identify digital asset securities. The relevant section reads:
“The investigation raised questions regarding the application of the U.S. federal securities laws to the offer and sale of DAO Tokens, including the threshold question whether DAO Tokens are securities. Based on the investigation, and under the facts presented, the Commission has determined that DAO Tokens are securities under the Securities Act of 1933 (‘Securities Act’) and the Securities Exchange Act of 1934 (‘Exchange Act’).”