US SEC Imposes First Civil Penalties on ICOs
The US Securities and Exchange Commission (US SEC) announced that it imposed its first ever civil penalties on Initial Coin Offerings (ICOs). The agency stated that it had imposed these penalties against two ICOs only because of them not registering their token sales.
Reaching a Settlement
Two ICO firms, CarrierEQ Inc. (Airfox) and Paragon Coin Inc., were penalized by the SEC for conducting their token sales in 2017 after the regulator had already “warned” the crypto community through its July 2017 DAO Report of Investigation that ICOs could be deemed securities. This means that all ICOs should have registered their token sales to be compliant with SEC regulations.
Airfox has raised about $115 million through its token sales to fund the creation of its tokenized data system that will focus on emerging markets. Paragon raised $12 million through its token sale to develop Blockchain solutions for the cannabis industry.
The SEC announced that it had already reached a settlement with both the ICOs in question. According to the settlement, both companies would be required to return funds to the investors, pay additional penalties of $250,000 each, register their tokens as securities with the SEC and also file regular reports with the regulator.
By the nature of the settlements, it is clear that both Airfox’s and Paragon’s tokens were deemed to be securities (investments whose returns are dependent on the efforts of a third party’s success or efforts). Because both companies’ token were classified as securities, it was necessary for them to have registered them with the SEC in accordance with federal law.
The SEC also said that these two cases are subsequent to the agency’s “first non-fraud ICO registration case” which involved a firm called Munchee, Inc. Munchee has since returned all the money it collected from its token sales back to its investors and has stopped its offering, thereby avoiding penalties from the SEC.
Beware Violations
The Wall Street Journal reported that neither Paragon nor Airfox commented on the SEC’s claims. However, the orders that both companies received as a part of their settlement mean that they will need to file financial statements audited by third parties as well as other investor protection focused documents, just as traditional IPOs (Initial Public Offerings) need to submit.
The Co-Director of the Enforcement Division of the SEC, Stephanie Avakian is reported to have said that these two cases are a warning to those who are planning similar actions that the regulator is on the lookout for violators of the federal securities laws in relation to digital assets.