An ‘airdrop‘ is defined as the distribution of digital tokens or cryptocurrencies without monetary payment from the token recipient, which is often used as a means of marketing and supply distribution.
While this technique has become wildly popular, a recent cease and desist order from the U.S Securities and Exchange Commission (SEC) against Tomahawk Exploration LLC after its airdrop bounty program failed Howey Test, a test created by the Supreme Court for determining whether certain transactions qualify as investment contracts. This has become known as the Tomahawk Order.
In the Tomahawk Order, the SEC found that Tomahawk’s Bounty Program, which distributed 80,000 Tomahawkcoins (TOM) to approximately 40 wallet holders, fit the classification of a security sale as “[Tomahawk] provided TOM to investors in exchange for services designed to advance Tomahawk’s economic interests and foster a trading market for its securities.” This classification was made even though there was no payment, setting a potentially dangerous precedent for the current system of token airdrops.
The ramifications of increased regulatory scrutiny would be wide-reaching, as many blockchain projects, exchanges, and even major companies rely on this approach to scale their products and communities.
One prominent example of a major business that could be impacted is Earn.com, a crypto startup company that enables users to monetize their email messaging with digital currency, which was recently acquired by Coinbase for an undisclosed amount rumored to be north of $100 million.
A major portion of Earn.com’s business model is the support of the project’s staging Ethereum-based token airdrops directly to the platform’s growing user base. Given that at least a portion of Earn.com’s value is tied to its airdrop marketing offering, Coinbase will likely see a partial loss on its investment if airdrops are slapped with regulations.
Taken together, anyone looking to stage a cryptocurrency airdrop should consider the significant potential legal outcomes if the SEC decides to expand its regulatory scrutiny.
More: Airdrop of Crypto Tokens Hits Regulatory Flak
Related: Ethos Launches Airdrop Program for Mobile Cryptocurrency Wallet
Disclaimer: This article’s author has cryptocurrency holdings that can be tracked here. This article is for informational purposes only and should not be taken as investment advice. Always conduct your own due diligence before making investments.