How Ian Balina’s SEC lawsuit may influence future crypto securities cases

Crypto influencer Ian Balina claims he has turned down a settlement agreement with the Securities and Exchange Commission (SEC), denying allegations of unlawfully selling Sparkster (SPRK) tokens. Meanwhile, Sparkster has agreed to an undisclosed settlement.

Balina was one of the prominent faces of the 2017 crypto ICO mania, promoting a variety of controversial projects on his YouTube channel. He’s made and lost millions in crypto, as well as created an unforgettable music video.

On Monday, the SEC filed a lawsuit against the influencer, alleging that he unlawfully promoted and sold an unregistered security — a token named SPRK created by Sparkster. The firm stated its mission was to power a ‘no-code’ platform that would run on “the world’s fastest Decentralized Cloud for Smart Software.”

The SEC seeks to:

• Forbid Balina from selling or promoting securities, whether unregistered or not, including ‘crypto asset securities.’
• Ban Balina from making money from publicly supporting securities.
• Recoup any “ill-gotten gains” and asks Balina to pay civil penalties.

SEC says Balina failed to disclose hefty SPRK bonus

Balina was recruited specifically by Sparkster’s CEO for his ability to “make a lot of noise about the project” and because he “took an ICO from 12 millions token sold to 36 million sold in one day.”

Balina promoted SPRK token on his website as a ‘Hall of Fame’ ICO, in his Telegram channel, and on his YouTube.

According to the SEC, he purchased approximately 7,143 ether (~$5 million) shares of SPRK during the pre-sale SAFT (Simple Agreement for Future Tokens).

• The tokens were priced at $0.15 at the time.
• Balina’s SAFT allegedly stated he would receive a ‘30 percent bonus,’ a little over 43 million SPRK.
• Balina was the only individual who was allowed to invest this much. 

This SAFT specifically warned that US residents “must not buy” the tokens. This, however, allegedly failed to dissuade US resident Balina.

Over Telegram, the Sparkster group later voted to eliminate bonuses. However, the SEC says its chief exec assured Balina that he would still get his tokens — which the influencer failed to disclose publicly.

Balina denies claims while Sparkster settles

In a written statement published on his website, Balina says the SEC’s claims are entirely baseless. According to the influencer, he only invested $100,000 into Sparkster and says there’s “no evidence” that he received any kind of bonus from the firm.

“Nor did Mr. Balina profit from his purchase of Sparkster tokens. If anything, Mr. Balina is a potential victim of fraud and misrepresentation from the Sparkster team, like other investors,” the notice states (our emphasis).

On Twitter, Balina said he’s “excited to take this fight public.” He claimed he’ll fight the charges in court all the way and that he turned down a settlement “so they have to prove themselves.”

Read more: Criminals seem to have nine lives when it comes to crypto

Meanwhile, Sparkster announced that it had reached a settlement agreement with the SEC. The firm claims it did so to avoid a long and drawn out legal battle, to better serve its clients. Sparkster’s statement makes clear that by settling, it neither admits or denies any of the SEC’s findings.

“To protect our Sparkster community, Sparkster agreed to destroy all SPRK Tokens in our possession and to allow the SEC to reimburse all purchasers for the cost paid in connection with the Tokens plus interest,” it reads.

How the SEC’s Balina case could signal more in store

One of the features of this case that likely drew SEC attention was that rather than just promote the token, Balina is also accused of selling it to members of his Telegram channel.

The SEC says he created a smart contract that allowed his fans to deposit ether in exchange for a portion of the ‘bonus’ tokens that Ian would be receiving. This pool ended up including other US residents whom Balina made no effort to dissuade. The rapper and influencer even acknowledged in a form that users were made to fill out that this could constitute an ‘unregistered securities offering’. 

In the course of its argument, the SEC makes the claim that the transactions to purchase SPRK from Balina took place in the United States because they “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.”

Read more: SEC chair says PoS crypto may be securities hours after Ethereum Merge

Relying on the location of the validating nodes to determine that it was a US transaction potentially makes a vastly larger number of transactions under their purview. This argument is similar to one brought before the Second Circuit in Williams v. Block One that “all of the transactions verified by the network are domestic because a plurality of blockchain nodes were located in the United States.”

The court eventually narrowed this argument to “the location of the node that verified the specific transaction at issue.” In Williams v. Block One the Second Circuit points out that the existing precedent suggested status as a US resident alone may not be enough to establish a domestic transaction, and so they do look to the location of validating nodes.

The SEC has been slow to pursue promoters of unregistered securities, but this case may be signalling an increase in that type of activity. Past cases in cryptocurrency include them pursuing former boxer Floyd Mayweather, though he has persisted even after that settlement.

The SEC has used similar statutes to pursue cases surrounding earlier internet scams, including the Vicemail cases in 2007, where individuals involved in using voicemails to pump and dump stocks were prosecuted.

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