SEC Imposes First-Ever Penalties for ICO Securities Registration Violations
As of November 16th 2018, the SEC has charged two companies with operating ICOs that committed securities registration violations. Regardless of utility token claims, the SEC fined the two companies and now requires them to operate in compliance with federal securities laws. Both companies agreed to pay the fines, register their tokens as securities, return funds to harmed investors, and perform periodic reporting to the SEC.
Details of the SEC’s Most Recent ICO Charges Explained
The SEC has imposed its first non-fraud related civil penalties against two different ICOs that violated the commission’s securities registration laws.
AirFox and Paragon Coin were the two entities who received such charges. According to the SEC’s orders, of critical importance was how both companies launched ICOs in 2017 after the SEC released its DAO Report, which the commission says “warned that ICOs can be securities offerings”.
Boston-based AirFox raised around $15 million from investments which were set to fund its utility token ecosystem. According to their whitepaper, users could exchange tokens for data by interacting with advertisements.
Notably, AirFox says their token, the AirToken, “is an Ethereum-based ERC-20 digital utility token”.
Paragon raised approximately $12 million during its funding period which they would use to integrate blockchain technology with the cannabis industry and work towards the legalization of cannabis.
According to the SEC, neither of the two registered their ICOs with the SEC as required by federal securities laws, nor did they qualify for an exemption.
The Corrective Action Issued by the SEC to AirFox and Paragon
In response to the violations, the SEC imposed $250,000 penalties to each company. The SEC also required the companies to compensate harmed investors who purchased tokens “in the illegal offerings”.
The companies will now be required to register their tokens as securities with the SEC, and file routine reports to the commission for a minimum of one year.
Without publicly denying or admitting to the charges, both AirFox and Paragon consented to the orders. According to the SEC’s press release, there is no indication of an ongoing investigation.
A few officials commented on the recent charges. Stephanie Avakian, Co-Director of the SEC’s enforcement division, outlined the precedent set by the recent action:
“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. 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.”
Steven Peikin, the other Co-Director of the SEC’s enforcement division, emphasized the example that the commission’s interaction with AirFox and Paragon can serve for others:
“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.”
What the Action Against Airfox and Paragon says about the SEC
The recent news isn’t the only headline with SEC activity as of late. Earlier this month, the SEC expanded its crackdown to investment advisors and custody requirements. Just over one week ago, the SEC charged EtherDelta’s founder with operating an unregistered securities exchange. With the latest news involving AirFox and Paragon, it is clear that the SEC has a firm stance regarding regulatory compliance in the cryptocurrency space.
However, the SEC also released a public statement on November 16th concerning the emerging class of ‘digital asset securities’. While the SEC claims to be in support of enabling blockchain technology to flourish— as seen through its launch of FinHub— they want token issuers to remain compliant according to existing regulations.
A potential result of the ongoing increased SEC activity could be an industry-wide turn towards security tokens. As explained by Harbor CEO Josh Stein, compliant security tokens involve the tokenization of pre-existing financial securities such as stocks, bonds, investment funds, etc. Such securities have had pre-existing regulations long before blockchain technology emerged, as noted by the SEC in recent statements. So long as those pre-existing regulations can be transparently enforced through various algorithms and smart contracts when a security becomes tokenized, no regulations will be violated.
Some companies are already abandoning ICOs and turning to Security Token Offerings (STOs).
The SEC is not just monitoring the space, they’re actively regulating it. To avoid penalties, many could turn to the STO as a compliant means to raise capital.
What do you think about the SEC’s recent charges against AirFox and Paragon Coin? Will such activity push the blockchain industry towards Security Token Offerings? Let us know what you think in the comments below.
Image courtesy of the SEC.