The U.S. Securities and Exchange Commission building in Washington. Photo: Diego M. Radzinschi/ALM

 

 

 

 

 

 

 

 

 

 

The U.S. Securities and Exchange Commission has handed down its first civil penalties to the issuers of initial coin offerings, solely for failing to register as securities in a pair of settlements announced Friday.

In two separate orders, the SEC imposed $250,000 penalties against ICO issuers CarrierEQ, Inc., which does business as Airfox Inc, and Paragon Coin. The orders also force the companies to register their respective offerings, make all associated filings, and require them to compensate investors harmed by purchasing tokens in the unlawful offerings. As is custom in most SEC matters, the companies neither confirmed nor denied the SEC's allegations against them as part of the settlement.

AirFox is represented by Michael Hines in the Boston office of Skadden, Arps, Slate, Meagher & Flom. Paragon is represented by a team at Schulte Roth & Zabel.

Schulte's Howard Schiffman said in a brief phone interview that the Paragon deal was “a significant matter, which we think lays the legitimate path for ICO registration going forward.”

According to the SEC, AirFox is a Massachusetts-based company that allows prepaid mobile users to earn free or discounted service by interacting with advertisements on their smartphones. The SEC claims that between August and October 2017, AirFox offered and eventually sold digital “AirTokens” issued on the Ethereum blockchain, raising about $15 million in capital to fund a new, international business and ecosystem. The SEC says AirFox told investors they would be able to buy and sell things other than mobile data over the platform.

“In connection with the offering, AirFox stated that AirTokens would increase in value as a result of AirFox's efforts, and that AirFox would undertake efforts to provide investors with liquidity by making AirTokens tradeable on secondary markets,” says the SEC order. “A purchaser in the offering of AirTokens would have had a reasonable expectation of obtaining a future profit based upon AirFox's efforts, including AirFox revising its app, creating an 'ecosystem,' and adding new functionality using the proceeds from the sale of AirTokens.”

According to the SEC, the AirToken launch violated Sections 5(a) and 5(c) of the Securities Act of 1933 by offering securities without having a registration statement on file—or qualifying for exemption from registration.

An outside spokeswoman for AirFox said as one of the first corporations to settle with the SEC, the company “expects to continue growing its blockchain platform within a regulatory framework.”

“Our team continues to forge ahead on our mission to democratize financial services for the billions of unbanked in emerging markets,” she said.

According to the SEC, Paragon is a web-based company that sought to implement blockchain technology to help bolster the growing cannabis industry. The SEC says that from August through October 2017, Paragon offered its PRG tokens on the Ethereum blockchain and raised about $12 million in digital assets via the offering.

“In connection with the offering, Paragon described the way in which PRG tokens would increase in value as a result of Paragon's efforts and stated that PRG tokens would be traded on secondary markets,” says the SEC order. As in the AirToken case, the SEC found that the PRG offering violated Sections 5(a) and 5(c) of the Securities Act.

In a press release announcing the settlement, Paragon CEO Jessica VerSteeg said the company had worked on the deal for a year.

“Paragon is making history!” she said. “This resolution with the SEC gives Paragon the path forward to full compliance with the U.S. securities laws and clears the way for Paragon to pursue its vision of bringing transparency and accountability to the cannabis industry through blockchain technology.”

In a press statement announcing the two settlements, Stephanie Avakian, the co-director of the SEC's Enforcement Division said that that the agency has made it clear that ICO issuers must abide by existing regulations.

“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,” she said.

Her co-director, Steven Peikin added: “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.”

The investigation into Paragon was conducted by Pamela Sawhney of the Enforcement Division's Cyber Unit and was supervised by Cyber Unit Chief Robert Cohen. The investigation into AirFox was conducted by Colin Forbes, Emily Holness, and Michael Vito and supervised by Celia Moore, Amy Gwiazda, and John Dugan, all of the SEC's Boston Regional Office.