The US Securities and Exchange Commission (SEC) launched a lawsuit against The Hydrogen Technology Corporation.
According to the charges, the company was engaged in unregistered offering and sales of crypto asset securities.
The complaint filed by the SEC dictates that Hydrogen, which is based in Miami, and its chief executive, Michael Ross had developed the hydro token in January 2018.
They then used a variety of methods to distribute the token publicly, which included bounty programs, airdrop, selling directly on trading platforms and employee compensation.
The SEC also asserted that a company based in South Africa called Moonwalkers Trading Limited had been hired by Hydrogen and Kane.
They had done so for creating a false appearance about the hydro token enjoying robust market activity and they used bot activity for this purpose.
The regulator asserted that this had helped them in selling the Hydro token into a market that they had inflated artificially for profiting on behalf of Hydrogen.
Due to the conduct of the defendants’, the company had been able to enjoy profits of as much as $2 million.
The SEC’s stance
Chief of the Market Abuse Unit of the SEC’s Enforcement Division, Joseph Sansone said that the defendants had created a misleading picture of the market activity of Hydrogen in order to profit from it.
He added that it was the SEC’s aim to ensure all types of activities can enjoy fair markets, so it would continue to expose those who manipulate the market and hold them accountable.
The SEC makes use of the renowned Howey test for determining if an asset is a security. The test states that any investment that promises dividends based on the efforts of a third party is a security.
Theoretically, the lawsuit filed against Hydrogen may also establish that tokens will be considered unregistered securities if they are distributed via airdrops.
This is a method used for token distribution and has been used for creating DAOs, as ownership and responsibilities are transferred from a core team to members who are decentralized.
Hydrogen issued a statement in response to the lawsuit and said that the matter has been ongoing for several years now and did not have any merit.
The company also added that it would litigate the case of the SEC. The chief executive of Moonwalkers, Tyler Ostern opted for a different stance.
According to the SEC, he was ready to pay back illicit gains of about $36,750, along with civil penalties that would be determined at a later date by the court.
The SEC’s filing in Manhattan’s federal court was also seeking a number of penalties against Kane and Hydrogen.
The Associate Director of the Enforcement Division of the SEC, Carolyn M. Welshhans said that companies cannot sale and offer unregistered securities by structuring them as compensation, bounties, or other methods to circumvent the federal securities law.
She said that the Hydrogen case shows that the SEC would take action for preventing the exploitation of consumers through such unregistered schemes.