The U.S. Securities and Exchange Commission (SEC) has taken action against an oil and gas exploration company and its founder who “perpetrated a fraudulent initial coin offering (ICO) to fund oil exploration and drilling in California.” The token sale failed to raise money but the tokens were issued as part of a bounty program, which the SEC considers securities.
SEC Took Action
The SEC announced Tuesday that it has taken action against David Thompson Laurance and the oil and gas exploration company he founded, Tomahawk Exploration LLC. Laurance attempted to raise money by issuing digital tokens, tomahawkcoins (TOM).
Founded by Laurance in 2010, Tomahawk “engaged in an offering of Tomahawk securities that constituted penny stock,” the SEC described. The 76-year-old California resident is the sole managing member of Tomahawk.
“The SEC’s order finds that Tomahawk and Laurance violated the registration and antifraud provisions of the federal securities laws,” the Commission detailed, adding:
Without admitting or denying the SEC’s findings, Tomahawk and Laurance consented to a cease and desist order and Laurance consented to an officer and director bar, penny stock bar, and a $30,000 penalty.
The SEC has obtained a permanent officer and director bar against Laurance which prevents him from serving as an officer or a director of any SEC-reporting company.
The penny stock bar prohibits him from owning a penny stock in his own account as well as engaged in any activities related to an offering of a penny stock including acting as a promoter, finder, consultant, agent, broker, dealer, or issuer.
The Founder and his Company
According to the SEC, Laurance “perpetrated a fraudulent initial coin offering (ICO) to fund oil exploration and drilling in California.”
He used “inflated projections of oil production that were contradicted by the company’s own internal analysis” in his promotional materials. In addition, he “misleadingly suggested that Tomahawk possessed leases for drilling sites when it did not,” the Commission clarified.
Tomahawk’s promo materials described Laurance as having a “flawless background,” omitting information about his prior criminal conviction for his role in fraudulent securities offerings. “Tomahawk also claimed that token owners would be able to convert the tomahawkcoins into equity and potentially profit from the anticipated oil production and secondary trading of the tokens,” the SEC detailed.
Robert A. Cohen, Chief of the SEC’s Cyber Unit, warned:
Investors should be alert to the risk of old-school frauds, like oil and gas schemes, masquerading as innovative blockchain-based ICOs.
No Money Raised but Bounty Tokens are Securities
Tomahawk originally wanted to raise $5 million through the ICO after failing to raise funds through private investments and public capital markets.
The company, however, “failed to raise money through the ICO…[but] issued approximately 80,000 TOM as part of a ‘bounty program’ in exchange for online promotional and marketing services,” the SEC noted. Based on the facts and circumstances of the case, “TOM tokens are securities because they are investment contracts…and because they represent a transferable share or option on a security,” the Commission elaborated:
Tomahawk’s issuance of tokens under the bounty program constituted an offer and sale of securities because the company provided TOM to investors in exchange for services designed to advance Tomahawk’s economic interests and foster a trading market for its securities.
The SEC concluded that Tomahawk and Laurance violated the Securities Act by “offering and selling TOM without having a registration statement filed or in effect with the Commission or qualifying for an exemption from registration with the Commission.”