Despite the Securities and Exchange Commission (SEC) toughening its regulation of virtual currencies and initial coin offerings, enforcement actions continue to be filed with increasing frequency.
The SEC has settled charges in its first cases that impose civil penalties on initial coin offerings (ICOs) solely for ICO securities offering registration violations.
According to the SEC’s press release, two companies, CarrierEQ Inc. (Airfox) and Paragon Coin Inc., sold ICOs improperly after the warnings issued in its 2017 DAO Report of Investigation that stated ICOs could be thereafter regulated as securities offerings.
Allegations of Registration and Compliance Violations Pertaining to ICO Sales
The Boston-based startup Airfox raised approximately $15 million in digital assets to back its development of a token-based “ecosystem,” which utilized a mobile application by which users earn tokens and exchange them for data through interaction with advertisements.
Paragon raised approximately $12 million worth of digital assets to develop and implement its online business plan to add blockchain technology to the cannabis industry and work toward legalization of cannabis.
According to allegations, neither Airfox nor Paragon had properly registered their ICOs in accordance with applicable federal securities laws. They also failed to meet requirements exempting them from registration.
Each company has agreed to return funds to affected investors, properly register the tokens as securities, file periodic reports with the Commission, and pay $250,000 each in associated penalties.
Enforcement Likely to Continue for Compliance Infractions
By continuing to vigorously enforce the regulation of securities offerings, the SEC is clearly indicating that digital entities that are issuing securities through ICOs must comply with the relevant, existing regulations governing the registration of securities or face enforcement action.
Steven Peikin, Co-Director of the SEC’s Enforcement Division, provides a relevant takeaway in the press release, saying:
“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.”
Contact Us With Compliance and Registration Questions
The regulatory landscape of virtual currencies is still undeveloped, resulting in a Wild West atmosphere. The applicable regulations still lack clarity, which means the risk of mistakes and subsequent enforcement for entrepreneurs and investors still relatively inexperienced in this undefined market is high.
Under these conditions, it is in a firm’s best interest to have someone in their corner to help them stay on top of the ever-changing regulations as they develop—Core Compliance & Legal Services, Inc., is ready to offer assistance.
Contact us here with questions regarding any compliance questions you may have.