The US Securities and Exchange Commission (SEC) has filed a lawsuit against The Hydrogen Company and market maker Moonwalkersfor. The regulator accused them of violating several provisions of the Securities Act.
According to an official press release, Hydrogen Technology Corp., its former CEO Michael Ross Kane and Tyler Ostern, CEO of Moonwalkers Trading Ltd. are accused of illegally selling tokens that the SEC identified as securities and “manipulating the trading volume and price of those securities.”
“The SEC complaint alleges that, beginning in January 2018, Kane and Hydrogen, a New York-based financial technology company, created its Hydro token and then publicly distributed the token in various ways,” according to the press release.
The Hydro project tokens were initially distributed to investors through airdrop, bounty programs, and rewarded to employees. Hydrogen then, the SEC claims, engaged South African firm Moonwalkers in October 2018 to “create a false appearance of active market activity” for the token using specialised trading software or “bots” and then sold it for an artificially “inflated” price in order to make a profit. The agency estimates that Hydrogen made more than $2 million in profits from these actions.
In a statement, Carolyn M. Welshans, associate director of the SEC’s Division of Enforcement, said:
“Companies cannot circumvent federal securities laws by offering unregistered securities in the form of fees, compensation or other similar methods. (…) The SEC will enforce laws prohibiting such unregistered fundraising schemes to protect investors.”
Hydrogen responded that the SEC’s case is “entirely without merit” and they will prove it in court, but this complaint could raise the issue of the legality of airdrops and bounty campaigns.
The SEC imposed restrictions on ICOs, classifying them as securities sales, in 2018. But disputes over the legality of airdrop and bounty campaigns continue.
Banking and administrative law lawyer Todd Phillips observed that the defendants in the Hydro case were selling tokens on the secondary market after the airdrop. Secondary market buyers were expecting prices to rise after Hydrogen repeatedly said it would.
Phillips said that if these sales had not taken place, the Hoey test would not have been passed.