The Securities and Exchange Commission announced it has settled its first civil penalties against a company solely for registration violations for selling digital tokens in initial coin offerings.
The two companies that settled, CarrierEQ, also known as Airfox, and Paragon Coin, conducted ICOs in 2017 after the SEC warned such offerings can be considered securities offerings.
CarrierEQ raised $15 million to finance development of a token-denominated ecosystem. The company announced plans in August 2017 to raise between $15 million and $21 million but repeatedly delayed the release of its ICO and removed thousands of contributors over money-laundering concerns.
Paragon raised about $12 million of digital assets to use blockchain technology in the cannabis industry. Neither company registered their ICOs or qualified for exemptions.
Under the settlement, the firms agreed to return funds to investors, register the tokens as securities, and pay penalties of $250,000. They also agreed to file periodic reports with regulators for at least one year.
Last December, the SEC stopped an ICO by Munchee, a company pitched as a way to source restaurant reviews. Munchee ultimately refunded tokens sold in a $15 million ICO.
“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,” said Stephanie Avakian, co-director of the SEC’s enforcement division, said. “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, co-director of the SEC’s enforcement division, 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 probe into Paragon was carried out by the SEC’s Cyber Unit. The AirFox probe was conducted by the Boston Regional Office.