US SEC Announces Securities Charges Against Hydro; Will the Howey Test Hold?

The Securities and Exchange Commission (SEC) has announced charges against The Hydrogen Technology Corporation, its former CEO, and the chief of Moonwalkers Trading Limited for “unregistered offers and sales of crypto asset securities.”

Joseph Sansone, Chief of the Enforcement Division’s Market Abuse Unit stated, “As we allege, the defendants profited from their manipulation by creating a misleading picture of Hydro’s market activity,”

SEC goes after Hydro

The regulator stated in a statement that the CEO of Moonwalkers, Tyler Ostern, and Hydro’s former CEO, Michael Ross Kane, manipulated the trading volume and price of the instruments that ended up generating more than $2 million for Hydrogen.

Therefore, in its complaint, the SEC accuses Hydrogen, Kane, and Ostern of breaking the securities laws’ registration, anti-fraud, and market manipulation provisions. It also asks for permanent injunctive relief, conduct-based injunctions, disgorgement with prejudgment interest, civil penalties, and other remedies.

Banking and administrative law attorney Todd Phillips explained that the crucial point is defendants selling tokens in the secondary market after the airdrop.

According to the SEC’s complaint, Kane and Hydrogen, a financial technology firm created its Hydro token in January 2018 and then distributed it publicly using a variety of strategies, including an “airdrop,” bounty programs, employee compensation, and direct sales on crypto asset trading platforms.

“Companies cannot avoid the federal securities laws by structuring the unregistered offers and sales of their securities as bounties, compensation, or other such methods,” said Carolyn M. Welshhans, Associate Director of the SEC’s Enforcement Division. “As our enforcement action shows, the SEC will enforce the laws that prohibit such unregistered fund-raising schemes in order to protect investors.”

According to Phillips, the expectation of profit from secondary market purchasers might be an important determinant of the Howey Test. Phillips stated in a Twitter thread, “The important thing here is that IF Hydrogen had airdropped tokens BUT NOT sold tokens afterward, the Howey Test wouldn’t have been satisfied (at least by Hydrogen).”

While the case is expected to bring clarity to the treatment of airdrops, GT Advisory previously determined in their expert advice that “While touted as “free” crypto, the blockchain project anticipates that the airdrop recipient will take actions to support the project.”

Further explaining that the Securities and Exchange Commission (SEC) may consider a “free” transfer of tokens to recipients without monetary consideration to be an unregistered sale of securities, depending on the relevant facts and circumstances.

GT Advisory notes in a blog post, “Tokens distributed to recipients without consideration during the launch of a blockchain-based technology project will, in almost all cases, be considered to be a security under the traditional Howey test.”