Yesterday the U.S. Securities and Exchange Commission (SEC) announced it reached a settlement with the Bloom Protocol. Bloom conducted a token ICO ending in January 2018, raising $31 million, and the SEC considers this ICO an unregistered securities offering.
Bloom started out focusing on credit scoring and currently offers self-sovereign identity solutions. Since its founding in 2017, it has had relationships with Transunion, BMW, Amex Middle East, and crypto lender BlockFi.
Under the settlement, Bloom has to pay the SEC $300,000, register its tokens as a security, and offer those that bought tokens in the ICO a refund. If it doesn’t comply, the $31 million raised will become a fine.
What’s unclear is how Bloom can afford to comply with the order without a major funding round. Its BLT token market capitalization is currently around $500,000, so one might guess that a fair number of people will ask for their money back.
Outside of Bitcoin and Ethereum, the SEC considers many tokens to be securities and is currently in litigation with Ripple, claiming XRP is a security. Additionally, as part of an insider trading lawsuit brought last month against an ex-Coinbase employee, the SEC alleges that nine tokens are securities. It is also investigating Coinbase for listing these securities.
Why Bloom was a soft target
The Howey Test is usually applied to digital assets to determine whether they are securities. This classifies a token as a security where there’s an investment of money in a common enterprise with a reasonable expectation of profits.
Nowadays, many blockchain protocols don’t bother with an ICO. They give the tokens away in the unacknowledged expectation that they will accumulate value, sidestepping the ICO legal risks. However, the Bloom Protocol conducted an ICO with both a pre-sale and a public sale without preventing U.S. buyers from participating. During the pre-sale, both Bloom and investors referred to the tokens as an investment and the sale as a financing.
The SEC said there were several indicators of meeting the ‘expectation of profit’ hurdle. This included meeting with venture capital firms for the pre-sale. Proceeds would be used for platform development and business expenses. The average investment in the pre-sale was $340,000 and $2,000 in the public sale, “both of which are not commensurate with
consumptive use” as a utility token, said the SEC. The company also failed to say how many tokens would be required for utility purposes.
Another reason Bloom was an easy target is that a U.S. registered company issued the tokens and didn’t create decentralized governance. In other words, the company is still in the driving seat. In contrast, other protocols like to claim that the corporate just does the software development, but the token holders make the decisions.
On top of this evidence, Bloom doesn’t have the deep pockets to put up a fight.