SEC Forces Initial Coin Offering Issuers to Register Tokens as Securities
The Securities and Exchange Commission (“SEC”) charged two companies, CarrierEQ Inc. (“Airfox”) and Paragon Coin Inc., (“Paragon”) who conducted Initial Coin Offerings (“ICOs”) after the SEC published its famous DAO Report of Investigation concerning the topic of ICOs.
On November 16, 2018, after an undisclosed investigation period by the SEC, two orders by the SEC forcing Airfox and Paragon to Cease and Desist their ICOs and register their tokens as securities. However, there is no guarantee that such tokens will ever make it through the registration process.
Airfox raised $15 million worth of digital assets to finance its development of a token “ecosystem” where they would start a mobile application that would create a market that would allow users to interact with advertisers. Airfox targeted users in developing countries.
Paragon raised $12 million to add blockchain technology to the cannabis industry to further legalize cannabis and related products.
As is customary with ICOs, the SEC alleges that neither company registered their tokens as securities, nor did they fit an exemption. Both companies paid $250,000 in penalties and the orders included undertakings to compensate any investors who may have been harmed as a result of purchasing tokens in the offerings.
How could Airfox and Paragon have conducted their ICOs legally? By registration, of course. How does that work? The law is still unclear. However, there has only been one ICO registration case where the SEC decided that there was no fraudulent intent, which is Munchee, Inc. The Commission did not impose a penalty or include undertakings from Munchee, which stopped its offering before delivery of tokens and returned all proceeds to the investors. The SEC highlights Munchee, Inc. as a virtuous ICO, since they disgorged their proceeds to the investors. This result is not promising.
If you would like to raise capital, then contact Wilson Bradshaw & Cao, LLP so you can raise capital in a compliant manner. We restrict our practice to securities law, in particular private and public offerings and SEC enforcement work.