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21 August 20223 minute read

The SEC has begun imposing automatic penalties for failure to comply with a consent order – the case of Bloom Protocol LLC

The SEC has continued to bring a steady stream of crypto asset enforcement actions. On August 9, the agency announced a settled proceeding against Bloom Protocol LLC arising from what the SEC found was an unregistered initial coin offering (ICO) which raised nearly $40 million between mid-November 2017 and early January 2018. However, Bloom Protocol is unique in that the consent order entered in the case imposes penalties on Bloom if it fails to meet its obligations - including registration.

Per the SEC, Bloom Protocol did not restrict US-based purchasers from participating in the ICO and there were apparently many US purchasers of the token offered in the ICO. The SEC found that the tokens were investment contracts and as such were securities for which a registration statement was required. There is no claim of fraud; rather the SEC only claims violations of the registration requirements of the Securities Act of 1933.

Of interest are the sanctions imposed against Bloom Protocol. In addition to a cease and desist order and a $300,000 civil penalty, Bloom Protocol has agreed to register under the Securities Exchange Act of 1934 by early May 2023, and 60 days thereafter implement a claims process, effectively a rescission offer, that will permit all those who purchased in the ICO to recover from Bloom Protocol (i) the amount they paid for any tokens purchased during the ICO together with interest from the date of the purchase (less any income received on the tokens), or (ii) damages, if they no longer own the token.

The order also requires Bloom Protocol to issue a press release notifying the public of the SEC’s order and providing a link to it. The order contemplates a four-month claims process, with Bloom Protocol reporting to the SEC on a monthly basis regarding, among other things, claims received and paid. If Bloom Protocol does not comply with its agreements in the order, then it will be required to pay a civil penalty equal to the amount it raised in its ICO less any amounts already paid to the SEC or token purchasers under the claims process.

Bloom Protocol is not the first SEC enforcement action in which the agency required the company offering a digital asset security to comply with registration provisions and establish a claims process. But the SEC's experience is that not all of those companies went on to complete the required registration process. That may be why Bloom Protocol is the first case in which the SEC has imposed what it has described as a “springing penalty” – meaning that the company will face a much larger penalty if it does not meet its obligations, including registration.

Find out more about the implications of this development by contacting the author.