In a sign that the Securities and Exchange Commission (SEC) is continuing to aggressively scrutinize token sales and initial coin offerings (ICOs), offers and sales of digital assets conducted by organizations using distributed ledger or blockchain technology are often referred to as “initial coin offerings” or “token sales,” the Division of Enforcement recently announced that it settled registration charges against two companies that sold unregistered digital tokens. Although neither company was accused of fraud or admitted to any wrongdoing, both companies agreed to offer to return funds to investors, register their tokens as securities, file periodic reports with the commission, and pay penalties of $250,000 each. Steven Peikin, co-director of the SEC’s Division of Enforcement described the settlements as a blueprint for companies that have conducted ICOs: “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.” These settlements are also instructive to companies contemplating ICOs in the future.

‘In the Matter of CarrierEQ, D/B/A AirFox’

According to the SEC, AirFox is a business that sells mobile technology for certain customers to earn free or discounted airtime and data by viewing advertisements on their phones. Between August and October 2017, AirFox raised $15 million by offering and selling approximately one billion digital tokens (AirTokens) to 2,500 purchasers. AirTokens were available for purchase in the United States and abroad. The SEC further alleged that, according to AirFox, users of Android smartphones would be able to earn AirTokens by viewing advertisements in the AirFox App and then could exchange the tokens for free airtime or data and ultimately other goods and services. At the time of the ICO, however, the AirFox App allegedly was released only in “beta” form and had no real users. Referencing AirFox’s business plan, blog posts, social media updates and White Paper, the SEC alleged that the purpose of the token offering was to raise capital to create and fund future development of the AirFox App as well as to fund new business segments. Moreover, according to the SEC, AirFox told prospective purchasers that the AirTokens would increase in value as a result of the company’s efforts and that the AirTokens would be tradeable on secondary markets. AirFox did not register the offering with the SEC before selling the tokens.