The SEC believes that Polygon’s native token, $MATIC, qualifies as a security for the following reasons, as outlined in their filing:
Founders and Development: Polygon, originally known as Matic Network, was founded in 2017 by Jaynti Kanani, Sandeep Nailwal, and Anurag Arjun, among others. The founders have remained actively involved through “Polygon Labs,” an entity established for the development and growth of Polygon.
Token Characteristics: Polygon issued a fixed supply of 10 billion MATIC tokens. Token holders can earn more MATIC through staking, becoming a validator, or delegating their tokens to other validators.
Token Sales: The entity carried out several rounds of MATIC sales between 2018 and 2019, raising funds for the development of the network. In 2022, Polygon reported raising approximately $450 million through a private sale of MATIC tokens to prominent venture capital firms. Additionally, about 67% of MATIC was reserved to support the Polygon ecosystem, the Foundation, and network operations, and another 20% was reserved to compensate Polygon team members and advisors.
Economic Incentives: The initial whitepaper for MATIC noted that MATIC tokens were expected to provide economic incentives for users to participate in activities or provide services to benefit the entire ecosystem on the Polygon Network.
Expectation of Profit: Information disseminated publicly by Polygon has led MATIC holders to reasonably expect profits from Polygon’s efforts to grow the Polygon protocol. The growth would, in turn, increase demand for and value of MATIC.
Public Statements and Updates: Polygon had routinely announced network growth and developments, as well as when MATIC was made available for trading on different platforms. Polygon’s founders have also regularly promoted the platform on social media, with explicit encouragement for MATIC purchasers to view MATIC as an investment.
Token Burning: Since January 2022, Polygon has been marketing that it “burns” MATIC tokens accumulated as fees, implying a reduction in the total supply of MATIC and leading investors to reasonably view their purchase of MATIC as having potential for profit due to the built-in mechanism to decrease supply and increase the price of MATIC.
Therefore, the SEC’s claim rests on the role of the founders in Polygon’s development and promotion, the economic incentives tied to MATIC, the use of funds raised from MATIC sales for the development and expansion of the Polygon platform, and the expectation of profit by MATIC holders.