SEC Charges Crypto-Sweeps Platform on Unregistered Securities

The SEC sued Offchain Labs Inc., the developer behind the Arbitrum blockchain, accusing the firm of running an unregistered securities offering tied to its ARB token airdrop program. The complaint, filed Wednesday in federal court in New York, alleges that the company distributed tokens to users through a "sweep" mechanism that met the legal definition of an investment contract.

The agency is seeking disgorgement of profits, civil penalties, and an injunction barring future violations. Offchain Labs did not immediately respond to a request for comment.

The case centers on a feature Arbitrum called "ARB token distribution sweeps" – a program that granted tokens to users based on past transaction activity on the network. The SEC alleged that the sweep constituted a security because users provided value (gas fees and network activity) in exchange for a token that the company promoted as having profit potential tied to development of the Arbitrum ecosystem.

"The allegations challenge a common practice in crypto: rewarding users for participation," said Katherine Wu, a partner at VC firm Archetype. "If the SEC wins on this theory, it could affect any project that has done a retroactive airdrop."

The regulator pointed to statements Offchain Labs executives made on social media and in podcasts suggesting the ARB token would appreciate in value as Arbitrum gained adoption. Those statements, the SEC said, created a "reasonable expectation of profits" that turned the sweep into an investment contract under the Howey test.