American CryptoFed slams ‘contradictions’ in SEC complaint
15:35, 7 December 2021
In its ongoing quest to register two utility tokens with the US Securities & Exchange Commission (SEC), American CryptoFed has hit the regulatory agency with seven new motions requesting additional information, pointing out what it calls discrepancies in previous statements leading to confusion and a lack of transparency by the SEC.
“We were set for a pre-conference hearing prior to a (20 December) deadline,” American CryptoFed CEO Marian Orr told Capital.com. “However, have asked with these filed motions for additional time.”
American CryptoFed contends it is not seeking to raise money from investors and its decentralised autonomous organization structure, by definition, means it has no traditional corporate executive structure to disclose.
“Neither the Commissioner nor her staff comment on any pending administrative proceedings,” said Benjamin Vetter, Counsel in the Office of SEC Commissioner Hester Peirce.
At issue is the various ways regulatory bodies classify digital assets, with the SEC considering some, but not all, as securities while the Commodity Futures Trading Commission treats some digital assets as commodities. The Internal Revenue Service classifies digital assets as property, according to IRS guidance.
The SEC is currently crafting the framework for what defines an investment contract and a security, which is expected to be finalised next year.
CryptoFed denies allegations that haven’t been made
While denying all allegations made by the SEC, American CryptoFed says it needs more information from the SEC to accurately address the concerns raised regarding the registration of its Locke and Ducat tokens in the Form 10 filed on 15 September.
The phrase “(American CryptoFed) lacks sufficient information to admit or deny the allegation,” appears in all seven of the motions filed late Friday and posted on American CryptoFed’s website. CryptoFed even goes so far as to deny allegations that haven’t even been made.
“To the extent any allegation is not specifically addressed herein, such allegation is denied. (American CryptoFed) demands strict proof of all allegations made in the (Order Instituting Administrative Proceedings),” American CryptoFed leads in the motion titled “CryptoFed’s Answer to the SEC’s Order.”
Misleading SEC guidance
Additionally, American CryptoFed “requests the Division of Enforcement to provide a more definite statement to the allegations…because Paragraphs 2, 4, 7, 14 and 15 contain contradictions among them that prevent (American CryptoFed) from correctly understanding the allegations and accurately answering these allegations.”
Noting the SEC rules requiring any potential issuer to file a Form 10 – and only Form 10 – to register any tradeable asset, American CryptoFed had to file Form 10, despite explicitly stating it does not intend its Locke or Ducat tokens to be considered Securities.
“(The SEC) asserts that ‘Form 10 is a registration statement used to register a class of securities pursuant to Exchange Act for which no other form is prescribed.’ This means that (American CryptoFed) had no choice but to use Form 10.”
Further, the SEC “actually contradicts its allegation by stating ‘American CryptoFed filed a Form 10 registration statement with the (SEC), seeking to register two classes of digital assets, the Ducat token and the Locke token, as equity securities,’ while completely omitting part of the allegation ‘[t]he Form 10 stated throughout that the Ducat and Locke tokens were not securities.’”
“The inherent contradictions require the Division to specify whether Form 10 is the only and correct form for (American CryptoFed’s) Locke and Ducat registration and whether the material and substantive information that Locke and Ducat are not securities, should be added to the Form 10 as asserted so that (American CryptoFed) can address the allegations. Thus, a more definite statement is necessary.”
SEC enforcement action
After filing the Form 10 in conjunction with an S-1 shelf registration for the Ducat and Locke tokens, the SEC issued an enforcement action against American CryptoFed on 10 November, in advance of the 15 November mandatory effective date of the Form 10 filing.
Citing “materially deficient and misleading information,” the enforcement action essentially halted the automatic registration of the tokens 60 days after the Form 10 filing. “We allege American CryptoFed made materially misleading statements and failed to provide legally required information in its registration form,” the SEC said in its news release.
Cheyenne, Wyoming-based American CryptoFed is attempting to register the Locke and Ducat as utility tokens and contends they are not securities. “For Locke token, all proceeds must be preserved and used for refunding, and no proceeds will be used for another purpose,” American CryptoFed contends. “For Ducat token, all proceeds must be preserved and used for redemption purposes, and no proceeds will be used for other purposes.”
“Under the design of token economics, no one could possibly and logically be damaged, whatsoever,” American CryptoFed contends. “In contrast, through the Order Instituting Administrative Proceedings, under the guise of ‘the protection of investors’ the SEC has done the opposite to deprive the rights of natural persons and entities to receive disclosure and the grant of Locke tokens, free of charge.”
Lockes and Ducats
American CryptoFed imagines a token economy in which Ducats are used as currency for consumer transactions, rewarding consumers with a 5.50% to 12% incentive for using Ducats and merchants receiving a 1% to 4% reward for accepting Ducats. Lockes, in turn, are used by American CryptoFed to purchase the Ducats out of circulation, preventing inflation.
“The possibility of any damages to any investors in this matter is so shadowy, indefinite, and equivocal that it must be put out of consideration as altogether unreal,” American CryptoFed contends to the SEC.
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