Cosmos (ATOM)
The SEC believes that Cosmos’s native token, $ATOM, qualifies as a security for the following reasons, as outlined in their filing:
Founders and Development: Cosmos was launched in 2017 by Jae Kwon and Ethan Buchman. These founders continue to actively participate in the project’s development through several entities, including the Interchain Foundation (ICF), Interchain GmbH, All in Bits, Inc. d/b/a Tendermint (now Ignite, Inc.), and NewTendermint, Inc. These entities support and develop the Cosmos ecosystem.
Token Characteristics: Cosmos employs a proof-of-stake consensus mechanism. ATOM, its native token, serves as a license for holders to vote, validate, or delegate to other validators and can also be used to pay for transaction fees.
Token Sales: In 2017, the ICF conducted a “Cosmos Fundraiser,” exchanging ATOM tokens for BTC or ETH. This fundraising activity, which collected approximately $17.3 million, was used to fund the development of the Cosmos network.
Entities Involved in Development: At least four entities, including the ICF, Interchain GmbH, Tendermint, and NewTendermint, have been significantly involved in the development of Cosmos, employing a team of approximately 35 software engineers and operations personnel.
Public Statements and Updates: Cosmos has routinely announced network growth and developments, and ATOM has been available for trading on platforms like Binance.com and Binance.US since 2019. Publicly disseminated information has led ATOM holders to reasonably view ATOM as an investment and expect profit from the growth of the Cosmos protocol.
Use of Fundraising: The ICF has pooled and deployed the funds raised through the Cosmos Fundraiser to develop the Cosmos network. The funds have been used to contract with entities to develop the Cosmos Essential Software and Services (CESS) and foster a community around CESS.
Token Distribution: The 236 million ATOM tokens initially minted were distributed as follows: 10% to the ICF, 10% to Tendermint, 5% to initial or “lead donors,” and 75% to the participants of the Cosmos Fundraiser.
The SEC’s claim rests on the founders’ involvement in Cosmos’s development and promotion, the economic incentives tied to ATOM, the use of funds raised from ATOM sales for the development and expansion of the Cosmos platform, and the expectation of profit by ATOM holders.
Filecoin (FIL)
The SEC believes that Filecoin’s native token, $FIL, qualifies as a security for the following reasons, as outlined in their filing:
Founders and Development: Filecoin, initiated by Protocol Labs, was developed by Juan Benet and his team. The founders have remained actively involved through “Protocol Labs,” an entity established for the development and growth of Filecoin.
Token Characteristics: Filecoin implemented a dynamic supply model, initially creating 200 million FIL tokens. Token holders can earn more FIL through mining by providing storage to the network.
Token Sales: The entity carried out an Initial Coin Offering (ICO) in 2017, raising funds for the development of the network. In this ICO, Filecoin reported raising approximately $257 million. Furthermore, a significant portion of FIL was reserved to support the Filecoin ecosystem, the Foundation, and network operations, and another segment was dedicated to compensating Filecoin team members and advisors.
Economic Incentives: The initial whitepaper for FIL noted that FIL tokens were expected to provide economic incentives for users to participate in activities or provide services for the benefit of the entire ecosystem on the Filecoin Network.
Expectation of Profit: Information disseminated publicly by Filecoin has led FIL holders to reasonably expect profits from Filecoin’s efforts to grow the Filecoin protocol. The growth would, in turn, increase demand for and value of FIL.
Public Statements and Updates: Filecoin has routinely announced network growth and developments, as well as when FIL was made available for trading on different platforms. Filecoin’s founders have also regularly promoted the platform on social media, encouraging FIL purchasers to view FIL as an investment.
Token Burning: Filecoin has a built-in mechanism that “burns” FIL tokens when they are used as collateral and are slashed for faults, implying a reduction in the total supply of FIL and leading investors to reasonably view their purchase of FIL as having potential for profit due to the built-in mechanism to decrease supply and increase the price of FIL.
Therefore, the SEC’s claim rests on the role of the founders in Filecoin’s development and promotion, the economic incentives tied to FIL, the use of funds raised from FIL sales for the development and expansion of the Filecoin platform, and the expectation of profit by FIL holders.