Synopsis of the Securities and Exchange Commission Proceeding and Order re:

In the Matter of Zachary Colburn (EtherDelta Exchange), November 8, 2018

SEC Release No. 34-84553; Administrative Proceeding File No. 3-18888

SEC Colburn Cooperation:

On November 8, 2018, the SEC issued an administrative consent ORDER instituting Cease-and-Desist Proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”) against the Respondent, Zachary Colburn, made Findings, issued a Cease-and-Desist Order, and imposed Remedial Sanctions including disgorgement of $313,000.00, a civil fine of $75,000.00, that these penalties could not be used as an offset against any future investor damage awards, and they were not dischargeable in bankruptcy pursuant to Section 523 of the bankruptcy Code, 11 USC §523.

Basic SEC Findings:

The respondent consented to the entry of the Order Instituting Cease-and-Desist Proceedings pursuant to Section 21C of the Securities Exchange Act of 1934, the Findings and Penalties.

On July 8, 2016, Coburn deployed the code for the first EtherDelta smart contract, written in the programming language Solidity, onto the Ethereum Blockchain.

EtherDelta’s website, launched by Coburn on July 12, 2016, provided a user-friendly interface and resembled an online securities trading platforms.  The EtherDelta platform was available to anyone, including U.S. persons, and had no specified hours of operation.  Users could interact directly with the EtherDelta smart contract or enter orders and trade tokens through the website 24 hours a day, seven days a week. EtherDelta’s business operations were defined and executed by EtherDelta’s “smart contract” that ran on the Ethereum Blockchain. The EtherDelta smart contract consisted of coded functions that allowed for the trading of any Ether/ ERC20 token pair. In posts on Reddit, Coburn explained that EtherDelta functioned just like a normal exchange with a book of orders.

On July 25, 2017, the Commission issued the DAO Report wherein the Commission advised that a platform that offered trading of digital assets that are securities and operated as an “exchange,” must register with the Commission or be exempt from registration.

From July 12, 2016 to December 15, 2017, more than 3.6 million buy and sell orders in ERC20 tokens  were traded on EtherDelta, of which approximately 92% were traded during the period following the DAO Report.

Statutory Violations:

EtherDelta met the criteria of an “exchange” as defined by 15 USC 78c(a)(1) and Rule 3b-16 thereunder. EtherDelta was not registered with the Commission as a national securities exchange and it did not operate pursuant to any exemption from registration. As a result, Coburn caused EtherDelta to violate Section 5 of the Exchange Act.

Order and Sanctions:

The SEC did not impose stiffer penalties since Colburn cooperated with the SEC staff investigation and he agreed with the sanctions imposed.

Cease and Desist:

Respondent Coburn shall cease and desist from committing or causing any violations and any future violations of Section 5 of the Exchange Act.

Disgorgement and Civil Penalty:

Respondent Coburn shall pay disgorgement of $300,000 and prejudgment interest of $13,000, for a total of $313,000, and a $75,000 civil penalty to the SEC subject to Exchange Act Section 21F(g)(3). The Respondent acknowledged that in exchange for the $75,000 civil penalty limit, he would cooperate with the Commission and agree to testify in any related enforcement actions.

No Penalty Offset:

To preserve the deterrent effect of the civil penalty, Colburn agreed that he could not argue that he was entitled to offset or reduction of any award of compensatory damages by the amount of any part of the civil penalty in any Related Investor Action.

No Bankruptcy Discharge:

In the final paragraph, the SEC order states that findings were true and admitted by Coburn, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Coburn under was a debt for the violation by Coburn of the federal securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19), and was  an exception to discharge.

Commentary by Attorney Timothy F. Mills, Editor / Action Cyber Times™ © 2018 All Rights Reserved.

Action Cyber Times™ provides resources for cybersecurity, data privacy, compliance, breach reporting and risk management, intellectual property theft, and the utilization of emerging technologies such as artificial intelligence, machine learning, blockchain DLT, advances in cryptographic applications, and more.

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