The U.S. Securities and Exchange Commission (SEC) settled charges against two companies that sold digital tokens in initial coin offerings (ICOs). These are the Commission’s first cases imposing civil penalties solely for ICO securities offering registration violations. Both issuers have agreed to return funds to investors, register the tokens as securities, file periodic reports with the Commission, and pay penalties.
According to the SEC’s orders, both CarrierEQ Inc. (Airfox) and Paragon Coin Inc. (Paragon Coin) conducted ICOs in 2017. Airfox, a Boston-based startup, raised approximately $15 million worth of cryptocurrencies to finance its development of a token-denominated “ecosystem”. Paragon raised approximately $12 million worth of crypto funds to develop and implement its business plan to add blockchain technology to the cannabis industry and work toward legalization of cannabis.
The Paragon coin has an interesting story. It was to be the currency of the marijuana industry. The project promised to eliminate the FIAT banking problems for Marijuana companies. Many of them were unable to open bank accounts because marijuana is still considered an illegal drug in many countries. The former Miss Iowa beauty queen Jessica VERSTEEG used to be the CEO of Paragon, a first-in-class blockchain platform built for the cannabis industry (read this FORBES article on her interesting background).
Neither Airfox nor Paragon registered their ICOs pursuant to the U.S. securities laws, nor did they qualify for an exemption to the registration requirements.
“We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities,” said Stephanie AVAKIAN, Co-Director of the SEC’s Enforcement Division. “These cases tell those who are considering taking similar actions that we continue to be on the lookout for violations of the federal securities laws with respect to digital assets.”
“By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws,” said Steven PEIKIN, Co-Director of the SEC’s Enforcement Division.
The SEC orders impose $250,000 penalties against each company and include undertakings to compensate harmed investors who purchased security tokens in the illegal offerings. The companies also will register their tokens as securities pursuant to the Securities Exchange Act of 1934. Airfox and Paragon consented to the orders without admitting or denying the findings.
Token Offerings are most likely Security Offerings
The U.S. regulator has turned out to be a real pacemaker for the crypto-industry. Over the last couple of months, the SEC has not only punished operators of illicit ICOs but also provided reasonable guidance for future token offerings. It’s pretty clear at this stage that the SEC tends to qualify ERC20 token offerings as security offerings in the first place. This is a lesson ICO issuers should learn rather quickly to avoid any problems with regulators in the United States and elsewhere.