The US Securities and Exchange Commission (SEC) has filed charges against The Hydrogen and its market maker, Moonwalkersfor, for allegedly engaging in unregistered securities and artificially inflating the token’s price.
The SEC charged the two companies and the two executives with violating the registration, anti-fraud and market manipulation provisions of the securities laws. The securities watchdog also sought permanent injunctive relief, conduct-based injunctive relief, disgorgement with prejudgment interest and civil penalties, among other remedies.
Misleading picture of Hydro market activity
According to the official press release, The Hydrogen Technology Corp., its former CEO, Michael Ross Kane, and Tyler Ostern, CEO of Moonwalkers Trading Ltd., are being subject to violations regarding the sale of tokens that the SEC identified as securities. in a market artificially inflated with robots.
The agency said the project’s native “Hydro” tokens were initially distributed to investors through Airdrops, rewards programs and as employee compensation.
The SEC complaint further alleges that after distributing the tokens, Kane and Hydrogen incorporated the South African company Moonwalkers in October 2018 to “create the false appearance of robust market activity” for the token by leveraging his custom trading software or “bot” and then sold it to this artificially inflated market for profit on behalf of Hydrogen. According to agency estimates, hydrogen generated more than $2 million as a result.
In a statement, Carolyn M. Welshhans, associate director of the SEC’s Division of Enforcement, said:
“Companies cannot avoid federal securities laws by structuring unregistered offers and sales of their securities as rewards, compensation, or other similar methods. As our enforcement action shows, the SEC will enforce laws that prohibit these unregistered fundraising schemes to protect investors”.
While Hydrogen believes the SEC’s case is “entirely without merit” and plans to pursue the legal route, the latest complaint may address the issue of the legality of airdrops and bounty campaigns.
Can Airdrop tokens be securities?
An airdrop is a free distribution of tokens of a specific project, with the main goal: to spread awareness. Rewards campaigns are also used for promotion, but are considered less expensive. The SEC’s crackdown on ICOs by classifying them as a sale of securities dates back to 2018. Since then, there has been considerable debate about the fate of airdrops and bounty campaigns.
Todd Phillips, banking and administrative law attorney stressed out that the defendants in the Hydro case sold tokens in the secondary market after the air launch. The expectation of profits as secondary market buyers anticipated a price increase as a result of hydrogen repeatedly touting the company’s profitability may be a crucial factor in the Howey test.
Phillips noted that if Hydrogen had not sold the chips after going public, the Howey test would not have been satisfied.
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