According to a complaint filed by the US Securities and Exchange Commission, FTX’s exchange token FTT was sold as an investment contract, and thus, the SEC has called it a “Security.”
The complaint described how, if the demand for trade on the FTX platform increased, the demand for FTT would increase and any price increase resulting from an increase in demand for the FTT token would benefit holders of the FTT Token in relation and proportion to the number of FTT tokens they hold.
According to the complaint, the FTX management team was incentivized by the “large allocation of tokens,” taking steps to “attract more users” into the trading platform and thus increase demand for, and increase the trading price of the FTT token.”
The claim was made by the SEC in a complaint against SBF’s alleged co-conspirators, Gary Wang, Co-Founder of FTX, and Caroline Ellison, CEO of Alameda Research.
The complaint further revealed that FTX used profits from the FTT Token sale to fund activities such as development, marketing, growth, and operations of FTX, while still publicly maintaining the FTT token as an “investment with profit potential.”
“The FTT materials made clear that FTX’s core management team’s efforts would drive the growth and ultimate success of FTX,” the complaint read.
Also mentioned in the complaint is the “buy and burn” program of FTX, which is akin to a stock buyback where revenues from FTX would repurchase and burn FTT, thus increasing its value. Although, it should be noted that this strategy is common practice among exchange tokens.
At the time of the FTX Launch in May 2019, says the complaint, FTX had a month earlier minted about 350 million FTT tokens and at the time of launch, about 175 million out of the 350 million minted were held by FTX management as “company tokens,” and 175 million were designated as non-company tokens. The company tokens were set to “unlock” (or become available for trading) over a three-year period after a so-called initial exchange offering (IEO) of the token.
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