On November 16, the Securities Exchange Commission (“SEC“) announced settled charges against two companies that sold digital tokens in initial coin offerings (“ICOs“). According to the Press Release announcing these settlements, these are the Commission’s first cases imposing civil penalties solely for ICO securities offering registration violations. The remedies agreed to include the return of funds to harmed investors, the registration of the tokens as securities under the Securities Exchange Act of 1934, the filing of periodic reports with the Commission, and the payment of $ 250,000 as a monetary penalty.
According to the SEC’s orders, both CarrierEQ Inc. (“Airfox“) and Paragon Coin Inc. (“Paragon“) conducted ICOs in 2017. Airfox, a Boston-based startup, raised approximately $15 million worth of digital assets to finance its development of a token-denominated “ecosystem” starting with a mobile application that would allow users in emerging markets to earn tokens and exchange them for data by interacting with advertisements. Paragon, an online entity, raised approximately $12 million worth of digital assets to develop and implement its business plan to add blockchain technology to the cannabis industry and work toward legalization of cannabis. Neither Airfox nor Paragon registered their ICOs pursuant to the federal securities laws, nor did they qualify for an exemption to the registration requirements.
The Orders emphasize that the offerings were made after the Commission warned that ICOs can be securities offerings in its DAO Report of Investigation and that the Orders should serve as a warning to other issuers. According to the Staff: “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 . . . 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.”
The Staff further emphasized that the Orders follow the Commission’s first non-fraud ICO registration case, Munchee, Inc., and noted that the Commission did not impose a penalty or include undertakings from Munchee citing the fact that it stopped its offering before delivering any tokens and promptly returned proceeds to investors. Airfox Order. Paragon Order.