Software development company Sparkster and its Chief Executive Officer Sajjad Daya agreed to collectively pay more than $35 million and consent to a cease-and-desist order for the offer and sale of unregistered crypto securities, the Securities and Exchange Commission (SEC) announced Monday.

From April 2018 to July 2018, Sparkster and Daya conducted an unregistered securities offering of cryptocurrency tokens, raising $30 million from 4,000 investors from the United States and abroad, the SEC alleged in its order.

Sparkster, which at the time was trying to raise funding, began presale of tokens in May 2018 and crowdsale in July 2018, per the order.

The tokens “as offered and sold were securities, were not registered with the SEC, and were not applicable for a registration exemption,” the SEC stated in a press release.

Without admitting or denying wrongdoing, Sparkster agreed to destroy its remaining tokens; request the removal of its tokens from trading platforms; and pay $30 million in disgorgement, approximately $4.6 million in prejudgment interest, and a $500,000 civil penalty.

Daya, without admitting or denying the SEC’s findings, agreed to a five-year bar from participating in offerings of crypto securities and pay a $250,000 civil penalty.

The SEC separately announced charges against crypto influencer Ian Balina for failing to disclose compensation he received for publicly promoting Sparkster tokens and failing to file a registration statement for the tokens he resold.

“The resolution with Sparkster and Daya allows the SEC to return a significant amount of money to investors and requires additional measures to protect investors, including the disabling of tokens to prevent their future sale,” said Carolyn Welshhans, associate director of the SEC’s Division of Enforcement, in a statement. “The SEC’s action against Balina further protects investors by seeking to hold accountable an alleged crypto asset promoter for failures to follow the federal securities laws.”

Compliance considerations: The SEC defines a “security” as a broad range of investment vehicles and instruments, including “investment contracts,” according to its complaint against Balina.

The Sparkster offering was conducted on the Ethereum blockchain. U.S.-based investors’ contributions to Balina’s pool were “validated by a network of nodes on the Ethereum blockchain, which are clustered more densely in the United States than in any other country,” the SEC stated in its complaint. “As a result, those transactions took place in the United States.”

The determination offers a case in which the SEC believes it has jurisdiction over Ethereum.

Sparkster response: The company said in a blog post on its Medium page that after being notified of the SEC probe in August 2019, it reviewed its know your customer procedures and discovered a “handful of participants that could possibly have been Americans that slipped through.”

“Moving forward, Sparkster is directing its efforts to the development of decentralized technologies and the pursuit of its mission,” the company said. “Rest assured, the Sparkster team is continuing its developments in full compliance with regulatory requirements.”

Sparkster agreed to certify in writing evidence of compliance with the SEC order’s requirements and to provide any further details the agency might request.

Jeff Dale is the Digital Editor of Compliance Week. He previously worked as a copy editor with the Boston Herald and Patriot Ledger in Quincy, Mass., and is a former city editor of The Hour Publishing Co. in Norwalk, Conn.

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