Cardano
The SEC claims that Cardano ($ADA) is a security, based on several reasons, as detailed in their filing:
Founders and Development: The Cardano blockchain and ADA token were created by Charles Hoskinson and Jeremy Wood, Ethereum co-founder and operations manager, respectively. They also established Input Output Hong Kong (IOHK), which is responsible for the blockchain’s design, building, and maintenance.
Token Sale: From 2015 to 2017, IOHK conducted a token sale during which approximately 25.9 billion ADA tokens were sold in exchange for Bitcoin, raising around $62 million for Cardano.
Management Entities: The Cardano blockchain is managed by the Cardano Foundation (legal custodian of the protocol and owner of its brand), IOHK, and Emurgo (a commercial entity driving the adoption of Cardano). These entities collectively received approximately 16.7% of the initial token supply.
Use of Funds: Proceeds from ADA sales have been used to fund the development, marketing, business operations, and growth of the Cardano protocol, as shown in the Cardano Roadmap created by IOHK.
Expectation of Profit: Public information from Cardano, IOHK, and Emurgo has led ADA holders, especially those who purchased ADA since November 2017, to view ADA as an investment and expect profits from the efforts of the entities above to grow the Cardano platform.
Marketing and Development Efforts: Public statements on various platforms describe the entities’ expertise in developing blockchain networks and the efforts they have made and will continue to make to develop the Cardano protocol and blockchain and attract users to the technology.
The SEC’s belief that ADA is a security thus rests on the active role of the Cardano Foundation, IOHK, and Emurgo in Cardano’s development and promotion, the expectation of profit by ADA holders, and the use of funds raised from ADA sales for the continued development and expansion of the Cardano platform.
COTI
The SEC contends that $COTI tokens should be classified as securities based on the following details presented in their filing:
Founders and Development: COTI is a company that provides a digital infrastructure for payments and is co-founded by Samuel Falkon and David Assaraf, with Shahaf Bar-Geffen serving as CEO. The Coti website is operated by Coti (BVI) Limited, registered in the British Virgin Islands.
Token Sale: On June 4, 2019, Coti conducted an Initial Exchange Offering (IEO) on a crypto asset trading platform, raising approximately $3 million by selling around 46 million COTI tokens. The maximum supply of COTI tokens is two billion.
Trading Platforms: COTI tokens have been available for buying, selling, and trading on the Binance.com platform since February 2020 and the Binance.US platform since April 2022.
Expectation of Profit: Information disseminated by Coti has led COTI holders, including those who purchased COTI since February 2020, to view COTI as an investment with profit expectations reasonably. Coti’s stated purpose for the IEO was to ensure an effective launch and generate greater visibility and liquidity.
Allocation and Lockup: The team and advisors were allocated a percentage of the total COTI supply with lockup periods in place. Team tokens had a minimum six-month lockup and were released over 24 months, while advisor tokens were locked for a 6-36-month period.
Development and Growth Efforts: Coti’s public statements on social media, Medium posts, and website describe the team’s efforts to develop the Coti blockchain and attract users to the technology. Medium posts highlight the team’s achievements, culture and aim for continued improvement.
Marketing and Expansion Plans: Coti’s Medium post outlining its plans for 2023 and beyond emphasized its unique optimization in solving payment challenges, gaining traction with more enterprises, and expanding the ecosystem. The website also highlights Coti as an all-in-one company offering a turnkey solution for enterprises.
Based on these factors, the SEC argues that COTI tokens meet the criteria of a security under the Howey Test due to the involvement of a centralized company, the expectation of profit-driven by Coti’s growth efforts, and the investment nature associated with COTI token transactions.