The Securities and Exchange Commission announced settled charges against two companies that sold digital tokens in initial coin offerings (ICOs). These are the Commission’s first cases imposing civil penalties solely for ICO securities offering registration violations.
CarrierEQ (Airfox) and Paragon Coin conducted ICOs in 2017 after the SEC warned that ICOs can be securities offerings in its DAO Report of Investigation. Airfox, a Boston-based startup, raised approximately $15 million worth of digital assets to finance its development of a token-denominated “ecosystem” starting with a mobile application that would allow users in emerging markets to earn tokens and exchange them for data by interacting with advertisements.
Paragon, an online entity, raised approximately $12 million worth of digital assets to develop and implement its business plan to add blockchain technology to the cannabis industry and work toward legalization of cannabis. Neither Airfox nor Paragon registered their ICOs pursuant to the federal securities laws, nor did they qualify for an exemption to the registration requirements.
The orders impose $250,000 penalties against each company and include undertakings to compensate harmed investors who purchased tokens in the illegal offerings. The companies also will register their tokens as securities and file periodic reports with the SEC for at least one year.
These cases follow the SEC’s first non-fraud ICO registration case, Munchee. The Commission did not impose a penalty or include undertakings from Munchee, which stopped its offering before delivering any tokens and promptly returned proceeds to investors.