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.

Disclaimer: The content available on the web site and in the blog posts is for informational purposes only and is not intended to, and does not, provide legal advice. Contact and retain an appropriate professional for legal advice. Use of this content or any of the links contained within the site do not create an attorney-client relationship. The opinions expressed are the opinions of the author.

Basic Findings:

From July through September 2017, Tomahawk Exploration LLC, an oil and gas exploration company, and its founder, Tom Laurance, offered and sold digital assets in the form of tokens called “Tomahawkcoins,” or “TOM,” through an online initial coin offering (“ICO”). Respondents sought to raise $5 million through the ICO, purportedly to fund oil drilling in Kern County, California. Promotional materials represented that TOM investors could trade their tokens for potential profits on a token trading platform, and that they would have the option to convert their tokens into Tomahawk equity at a future date. Although Respondents failed to raise money through the ICO, Tomahawk issued approximately 80,000 TOM as part of a “Bounty Program” in exchange for online promotional and marketing services.

Tomahawk and Laurance made materially false and misleading statements. The tokens were securities under SEC v. W.J. Howey Co., 328 U.S. 293 (1946), including the cases discussed by the Commission in its Report Of Investigation Pursuant To Section 21(a) Of The Securities Exchange Act Of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017) (the “DAO Report”).

Statutory violations:

Securities as ‘investment contracts’ – Tomahawk and Laurance violated Sections 5(a) and 5(c) of the Securities Act by offering and selling the tokens without having a registration statement filed or in effect with the Commission or qualifying for an exemption from registration with the Commission. First, the coins were securities in that they were “investment contracts.” An investment contract is an investment of money in a common enterprise with a reasonable expectation of profit to be derived from the efforts of others. See SEC v. Edwards, 540 U.S. 389, 393 (2004); Howey Co., supra, at 301; see also United Housing Found., Inc. v. Forman, 421 U.S. 837, 852-53 (1975).

Security if option, privilege or transferable – Second, TOM were also securities under the federal securities laws because they constituted “an option, or privilege on any security” and “transferable shares” under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act. Tomahawk’s offering represented the right to an equity share of Tomahawk and holders had the right to transfer them on a decentralized trading platform such that they were analogous to ordinary shares of stock. See Tcherepnin v. Knight, 389 U.S. 332, 336-40 (1967).

Equity security – Tomahawkcoin was an equity security, as defined in Section 3(a)(11) of the Exchange Act (15 USC §78c(a)(11)), because it was a security convertible into an equity security through its conversion feature.

Penny stock – TOM was also a “penny stock” because they did not meet any of the exceptions from the definition of a “penny stock” in Section 3(a)(51) of the Exchange Act (15 USC §78c(a)(51)) and Rule 3a51-1 thereunder.

Gift is a Sale if benefit – The distribution of TOM pursuant to the Bounty Program constituted sales under Section 2(a)(3) of the Securities Act, which applies to “every disposition of a security or interest in a security, for value.” The lack of monetary consideration for “free” shares did not mean that there was not a sale or offer for sale for purposes of Section 5 of the Securities Act. Rather, a “gift” of a security is a “sale” within the meaning of the Securities Act when the donor receives some real benefit. See SEC v. Sierra Brokerage Servs., Inc., 608 F. Supp. 2d 923, 940–43 (S.D. Ohio 2009), aff’d, 712 F.3d 321 (6th Cir. 2013).

Fraudulent representations – Tomahawk and Laurance also violated the antifraud provisions of the federal securities laws with respect to the offering. Specifically, they falsely stated Tomahawk’s prospects for success, using inflated projections of oil reserves and production that they claimed were “risk adjusted” when they were not. They also falsely represented that Tomahawk possessed leases for the project when it did not, and falsely stated that Laurance had a “flawless background” when he had a prior criminal conviction for conduct relating to securities offerings. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibiting fraud in connection with the purchase or sale of securities. Specifically, Rule 10b-5(b) prohibits making untrue statements of material fact or omitting to state a material fact necessary to make statements made not misleading in connection with the purchase or sale of any security.

As a result of the conduct described above, Tomahawk violated, and Laurance willfully violated, Sections 5(a) and 5(c) of the Securities Act.

As a result of the conduct described above, Tomahawk violated, and Laurance willfully violated, Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder.

Order and Sanctions:

Cease and Desist – Respondents Tomahawk and Laurance shall cease and desist from committing or causing any violations and any future violations of Section 5 of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Prohibition as principal – Respondent Laurance is prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 78l, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d); and barred from participating in any offering of a penny stock.

Civil Penalty – Respondent Laurance shall pay a civil penalty of $30,000, to the Securities and Exchange Commission for transfer to the general fund of the United States Treasury in accordance with Exchange Act Section 21F(g)(3).

No Bankruptcy Discharge:

Bankruptcy discharge of civil penalty – It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 523 of the Bankruptcy Code, 11 U.S.C. § 523(a)(19), the findings in this Order are a debt for the violation by Laurance of the federal securities laws. [Author’s note – the debt may not be discharged].

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.

Disclaimer: The content available on the web site and in the blog posts is for informational purposes only and is not intended to, and does not, provide legal advice. Contact and retain an appropriate professional for legal advice. Use of this content or any of the links contained within the site do not create an attorney-client relationship. The opinions expressed are the opinions of the author.

Synopsis of the Securities and Exchange Commission Civil Enforcement Action re:

SEC v Tomahawk Exploration LLC and David Thomson Laurance, 2018-152

Summary:

On August 14, 2018, the SEC issued an administrative consent ORDER instituting Administrative and Cease-and-Desist Proceedings pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) against Respondents, Tomahawk Exploration LLC, a Nevada LLC, (“Tomahawk”) and David Thompson Laurance (“Laurance”), sole managing member of Tomahawk, made Findings, issued a Cease-and-Desist Order, and imposed Remedial Sanctions including a civil fine of $30,000.00.

Basic Facts:

In 1993 Laurance was convicted of mail fraud and providing false information to the SEC in connection with a scheme to defraud investors in penny stock companies that he promoted and controlled.  In 2009 Laurance was the president of another gas and oil company against which the SEC filed charges against other individuals with registration violations and market manipulation of the stock. SEC v. Calmes, et al., Case No. 09-80524-CIV0-ZLOCH (S.D. Fla. Apr. 2, 2009). The company ceased operation and Laurance filed for personal bankruptcy in 2010 and again in 2016.

In 2014 Laurance sought to raise capital for an oil exploration project in California (the “Kern County Project”), however, in 2016 the SEC suspended trading of shares in the company. In 2017 Laurance instituted a plan to fund the project through an ICO by issuing “Tomahawkcoin” with an equity conversion option. The coins would be convertible to equity using the slogan, “Tomahawkcoin: Buy it once … it will pay you twice.” However, the ICO did not raise the required funds. Then Laurance developed a bounty program whereby the coins would be given to promoters for targeting potential investors and directing them to Tomahawk’s offering materials. But the effort was not successful and the ICO was abandoned by October, 2017.

Basic Findings:

From July through September 2017, Tomahawk Exploration LLC, an oil and gas exploration company, and its founder, Tom Laurance, offered and sold digital assets in the form of tokens called “Tomahawkcoins,” or “TOM,” through an online initial coin offering (“ICO”). Respondents sought to raise $5 million through the ICO, purportedly to fund oil drilling in Kern County, California. Promotional materials represented that TOM investors could trade their tokens for potential profits on a token trading platform, and that they would have the option to convert their tokens into Tomahawk equity at a future date. Although Respondents failed to raise money through the ICO, Tomahawk issued approximately 80,000 TOM as part of a “Bounty Program” in exchange for online promotional and marketing services.

Tomahawk and Laurance made materially false and misleading statements. The tokens were securities under SEC v. W.J. Howey Co., 328 U.S. 293 (1946), including the cases discussed by the Commission in its Report Of Investigation Pursuant To Section 21(a) Of The Securities Exchange Act Of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017) (the “DAO Report”).

Statutory violations:

Securities as ‘investment contracts’ – Tomahawk and Laurance violated Sections 5(a) and 5(c) of the Securities Act by offering and selling the tokens without having a registration statement filed or in effect with the Commission or qualifying for an exemption from registration with the Commission. First, the coins were securities in that they were “investment contracts.” An investment contract is an investment of money in a common enterprise with a reasonable expectation of profit to be derived from the efforts of others. See SEC v. Edwards, 540 U.S. 389, 393 (2004); Howey Co., supra, at 301; see also United Housing Found., Inc. v. Forman, 421 U.S. 837, 852-53 (1975).

Security if option, privilege or transferable – Second, TOM were also securities under the federal securities laws because they constituted “an option, or privilege on any security” and “transferable shares” under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act. Tomahawk’s offering represented the right to an equity share of Tomahawk and holders had the right to transfer them on a decentralized trading platform such that they were analogous to ordinary shares of stock. See Tcherepnin v. Knight, 389 U.S. 332, 336-40 (1967).

Equity security – Tomahawkcoin was an equity security, as defined in Section 3(a)(11) of the Exchange Act (15 USC §78c(a)(11)), because it was a security convertible into an equity security through its conversion feature.

Penny stock – TOM was also a “penny stock” because they did not meet any of the exceptions from the definition of a “penny stock” in Section 3(a)(51) of the Exchange Act (15 USC §78c(a)(51)) and Rule 3a51-1 thereunder.

Gift is a Sale if benefit – The distribution of TOM pursuant to the Bounty Program constituted sales under Section 2(a)(3) of the Securities Act, which applies to “every disposition of a security or interest in a security, for value.” The lack of monetary consideration for “free” shares did not mean that there was not a sale or offer for sale for purposes of Section 5 of the Securities Act. Rather, a “gift” of a security is a “sale” within the meaning of the Securities Act when the donor receives some real benefit. See SEC v. Sierra Brokerage Servs., Inc., 608 F. Supp. 2d 923, 940–43 (S.D. Ohio 2009), aff’d, 712 F.3d 321 (6th Cir. 2013).

Fraudulent representations – Tomahawk and Laurance also violated the antifraud provisions of the federal securities laws with respect to the offering. Specifically, they falsely stated Tomahawk’s prospects for success, using inflated projections of oil reserves and production that they claimed were “risk adjusted” when they were not. They also falsely represented that Tomahawk possessed leases for the project when it did not, and falsely stated that Laurance had a “flawless background” when he had a prior criminal conviction for conduct relating to securities offerings. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibiting fraud in connection with the purchase or sale of securities. Specifically, Rule 10b-5(b) prohibits making untrue statements of material fact or omitting to state a material fact necessary to make statements made not misleading in connection with the purchase or sale of any security.

As a result of the conduct described above, Tomahawk violated, and Laurance willfully violated, Sections 5(a) and 5(c) of the Securities Act.

As a result of the conduct described above, Tomahawk violated, and Laurance willfully violated, Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder.

Order and Sanctions:

Cease and Desist – Respondents Tomahawk and Laurance shall cease and desist from committing or causing any violations and any future violations of Section 5 of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Prohibition as principal – Respondent Laurance is prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 78l, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d); and barred from participating in any offering of a penny stock.

Civil Penalty – Respondent Laurance shall pay a civil penalty of $30,000, to the Securities and Exchange Commission for transfer to the general fund of the United States Treasury in accordance with Exchange Act Section 21F(g)(3).

No Bankruptcy Discharge:

Bankruptcy discharge of civil penalty – It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 523 of the Bankruptcy Code, 11 U.S.C. § 523(a)(19), the findings in this Order are a debt for the violation by Laurance of the federal securities laws. [Author’s note – the debt may not be discharged].

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.

Disclaimer: The content available on the web site and in the blog posts is for informational purposes only and is not intended to, and does not, provide legal advice. Contact and retain an appropriate professional for legal advice. Use of this content or any of the links contained within the site do not create an attorney-client relationship. The opinions expressed are the opinions of the author.