Data encryption startup Enigma MPC has settled charges with the US Securities and Exchange Commission (SEC) for conducting an unregistered initial coin offering (ICO). The company has agreed to return funds to harmed investors through a claims process, register its tokens as securities, file periodic reports with the SEC, and pay a $500,000 penalty.
According to the SEC’s order, Enigma raised approximately $45 million from the sale of 75 million digital assets called ENG Tokens to 6,000 people from an ICO in 2017. However, the regulator said, Enigma violated the Securities Act because it did not have a registration statement filed or in effect with the SEC and did not qualify for an exemption from registration. The company issued the ENG Tokens to investors through wholly owned Cayman Islands-based subsidiary Enigma ENG International Ltd.
Enigma MPC, formerly known as Newton Security Labs Inc., is a privately owned company based in Israel and San Francisco. It was established in 2015 to facilitate the sharing and analysis of encrypted data without decrypting it. Enigma marketed its Enigma Protocol, a technological and cryptographic method to end users in the health care and finance industries as a way to securely share data. According to the SEC, Enigma changed its business model in 2017 and announced that it planned to use the Enigma Protocol to develop a digital asset trade-testing platform called the “Catalyst Application” and to build a data marketplace for cryptocurrency-related data called the Enigma DataMarketplace.
The SEC said that between approximately June and September of 2017, Enigma promoted its ENG Token ICO on websites it maintained and through blog posts, social media posts, online videos, and online discussion boards. In its promotional materials, Enigma highlighted that the company was founded by “an MIT-bred team of experts, backed by top-tier investors.” The company also publicized the names of various Enigma advisers and described the advisers’ experience in the digital asset and business worlds and posted a white paper that described the technology Enigma proposed to build.
According to the order, Enigma paid promoters and others to tout Enigma as a good investment opportunity. It said Enigma engaged in a so-called “bounty campaign,” by offering ENG Tokens to third parties in exchange for promoting the ICO and Enigma Catalyst through social media, blogging, or for translating Enigma promotional materials into other languages.
The SEC said Enigma also sought to generate more interest in its ENG Tokens by working to have the tokens traded on secondary market digital asset trading platforms.
In what it referred to as the “pre-sale” portion of its offering, Enigma sold ENG Tokens in exchange for US dollars, Bitcoin, or Ether through a purchase agreement it called a “Simple Agreement for Future Tokens” or SAFT. These ENG Tokens were sold at a 10% discount relative to the ENG Tokens it later sold. The ENG Tokens sold through the SAFTs were supposed to be sold only to accredited investors. As part of the same offering, Enigma also conducted a one-day “crowd sale” and sold tokens to any and all general public investors.
“All investors are entitled to receive certain information from issuers in connection with a securities offering, whether it involves more traditional assets or novel ones,” John Dugan, associate director for enforcement in the SEC’s Boston Regional Office, said in a statement. “The remedies in today’s order provide ICO investors with an opportunity to obtain compensation and provide investors with the information to which they are entitled as they make investment decisions.”
Enigma consented to the SEC’s order without admitting or denying its findings.