Since its launch, FTX offered and sold the utility token FTT as an investment contract and, therefore, a security. The U.S. Securities and Exchange Commission (SEC) said so in a lawsuit.
The suit names former Alameda Research chief executive Caroline Ellison and FTX co-founder Gary Wang.
According to the SEC, around May 2019 the exchange issued 350 million FTT. Half of the issuance was intended for sale to investors in an IEO. The remaining 175 million tokens were designated as belonging to the company and were subject to a three-year lock-up period.
“The release of a large amount of FTT prompted the FTX management team to take steps to attract more users to the trading platform and, consequently, to increase demand for the tokens and their price,” the statement said.
The regulator noted that in the FTT white paper the exchange highlighted its profit potential. Investors were offered up to a 5% bonus for prepaying on FTX to participate in the IEO. FTX stated that the token would list at $1, while offering the asset to buyers at a price range of $0.1–$0.8.
The exchange gave token holders discounts on fees, allowed the asset to be used as collateral for futures positions, and promised other perks in the future.
“FTT was sold as an investment whose value would increase as FTX grew and expanded into other directions. FTX stated that it had ‘carefully devised incentive schemes to increase the network effect and demand for FTT’, as well as to reduce its market supply,” the SEC said.
The Commission found that, based on the FTT materials and the exchange’s statements, investors had reasonable expectations of profits from the team’s efforts.
The regulator charged the defendants with securities law violations. This manifested as negligence and deceit in the use of investors’ funds, as well as aiding in securities fraud.
The US Attorney’s Office for the Southern District of New York has also brought charges against Ellison and Wang in connection with the collapse of FTX. The defendants pleaded guilty.
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