October Legal Review

This October brought us some impressive law enforcement news that shook the blockchain world. The most notable were the cases brought by the Securities and Exchange Commission (SEC) and the Internal Revenue Services (IRS) against John McAfee. Also, this month, the SEC has ended the case of Kik Interactive, Inc. by obtaining a final judgment against the company.

John McAfee

A legendary computer programmer, who got involved in the blockchain industry during an ICO wave, John McAfee was charged by the SEC for nondisclosure of payments he received for promoting a number of tokens.

As many blockchain market participants know, John McAfee was very vocal about investing in tokens, supporting, endorsing, and marketing several ICOs in his Twitter account and at various conferences. He appeared to be impartial and independent. According to the SEC findings, Mr. McAfee was paid over $23 million in digital assets for such promotions, which he denied. Under the U.S. law, the investors are entitled to know whether the promoters are being compensated by the issuers of securities. Also, the SEC alleged that John McAfee made other false statements misleading the public about his investments into certain tokens and his advisory role in some ICOs.

Besides, the SEC claims that John McAfee was also involved in another scheme of touting certain tokens he had accumulated on Twitter and then selling those tokens as prices rose. This was essentially a “pump-and-dump” practice, which is illegal under the U.S. securities law.

As a result, the SEC charged John McAfee and his bodyguard Jimmy Watson Jr., who assisted him in these cases with violating antifraud provisions of the federal securities laws, Mr. McAfee with violating the anti-touting provisions, and Mr. Watson with aiding and abetting John McAfee’s violations. The SEC sought permanent injunctive relief, conduct-based injunctions, the return of allegedly ill-gotten gains, and civil penalties in addition to bar John McAfee from serving as a public company officer and director. The complaint against John McAfee and Jimmy Watson, Jr. was filed in the U.S. District Court for Southern District of New York.

Simultaneously, the IRS unsealed their charges for tax evasion and willful failure to file tax returns following the arrest of John McAfee in Spain. The charges relate to the same unlawful activities alleged by the SEC as well as to Mr. McAfee’s consulting work, speaking engagements, and selling rights to his life story for a documentary, for which he allegedly received income but failed to report it and pay income taxes.

The U.S. tax law requires U.S. taxpayers to file an annual income tax return regardless of their country of residence. Willful failure to file a tax return is considered a misdemeanor and can lead to a fine of not more than $25,000 or imprisonment of not more than one year, or both, for each count of violations.  The IRS alleged that John McAfee did not file his income tax return from 2014 to 2018.

Moreover, the IRS alleged that Mr. McAfee deliberately directed his income to be deposited into bank accounts and cryptocurrency exchange accounts of other people. According to the IRS, Mr. McAfee also concealed his assets, including real property, a vehicle, and a yacht, in the names of others as an attempt to evade his tax liability. Tax evasion is a much more serious crime and is considered a felony. If convicted, Mr. McAfee can face up to a $100,000 fine or imprisonment for not more than five years, or both, for each count.

John McAfee appears to be fighting all charges brought against him by the U.S. authorities.

Kik Interactive, Inc.

The case against Kik Interactive, Inc. initiated more than a year ago by the SEC has finally come to an end. On October 21^st, the SEC secured a final judgment on consent against the company for the unregistered offering of digital tokens “Kin” in 2017.

The allegations brought by the SEC against Kik Interactive, Inc., were based on the activities of the company before and during the ICO. The SEC alleged that by 2017 the business of the company was failing, and Kik Interactive, Inc., intended to finance its new operations by selling one trillion digital tokens. As a result of public and private sales, the company was able to raise about $100 million from investors worldwide.

Although the tokens were released upon the completion of the sale, no product could be used with the Kins. Instead, as the SEC’s alleged, the Kin tokens were marketed as an investment opportunity promising an increasing value of tokens due to the rising market demand driven by the efforts of the company. Kik Interactive intended to keep three million Kin tokens for the company to profit from the trade of tokens on a secondary market along with the investors.

Under the Howey Test used by the U.S. Courts to define securities, any instrument designed for the person to invests his/her money into a common enterprise and expect profit solely from the effort of the promoter could be considered an investment contract, which is one form of the securities. The claims made by Kik Interactive in connection with the sale of its tokens led the SEC to believe that Kik’s ICO was the unregistered securities offering.

Kik Interactive, Inc. attempted to fight the charges at first but then lost a summary judgment in September of this year and agreed to settle with the SEC. As a result, the Kin tokens were found to be securities by the Court, and the company was ordered to pay a hefty fine of five million dollars and to comply with the other non-monetary requirements set by the final judgment.   

This summary is provided by international attorney Katrina Arden. Attorney Katrina Arden spoke at the leading tech conferences, authored legal articles and participated in discussions with multiple countries’ regulators on the development and implementation of the blockchain and cryptocurrency law.

By Katrina Arden