SEC Registration Charges Settled | ICOs to Re-Fund Investors

Jan 08, 2019

SEC Registration Charges

Two cryptocurrency companies must return millions to investors for violating ICO federal regulations.

CarrierEQ Inc. (Airfox) and Paragon Coin Inc. agreed to repay funds to their harmed investors and register tokens as securities under the Securities Exchange Act of 1934, according to the settlement they reached with the U.S. Securities and Exchange Commission (SEC). Additionally, they each agreed to pay $250,000 fines, file periodic reports for a period of at least one year, according to the settlement.

Both Airfox and Paragon Coin agreed to the terms of the settlement without denying or admitting the violations.

The settlement caps the commission’s first cases that imposed civil penalties exclusively for ICO securities offering registration violations. Airfox and Paragon Coin were in violation because they failed to register their crypto fundraisers in compliance with federal securities laws. They did they qualify for an exemption to the registration requirements.

Background on These Two Cases

In 2017, Airfox and Paragon Coin conducted ICOs (Initial Coin Offerings), which is a type of funding using cryptocurrencies, after the SEC warned that they can be considered securities offerings.

ICOs, which most generate funds via crowdfunding, are become popular ways to attract investors. 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 Coin, which focuses its blockchain platform on the cannabis industry, raised approximately $12 million worth of digital assets to develop and implement its business plan to work toward legalization of cannabis.

SEC Shining Light on Violations in Cryptocurrency Businesses

The SEC has said that other companies working with cryptocurrency should pay attention to these cases. The SEC promises to continue to keep an eye out for federal security law violations with respect to digital assets, like cryptocurrency.

This settlement follow the commission’s first non-fraud ICO registration case, which involved Munchee, Inc. In this case, 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.

SEC Keeping Watchful Eye on ICOs

SEC has been watching ICOs, since they are fairly new ways to offer investment opportunities. The commission is attempting to draw more attention to these fundraising opportunities to prevent large-scale scams. Though these types of digital assets and the technology behind offer new and efficient ways to carry out financial transactions, the SEC states they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets.

In response to the fraud potential, the SEC has warned of the three “Rs” of ICOs: Risks, Rewards, and Responsibilities. The commission warns that ICO products not only can be considered securities offerings, but they can be bought and traded internationally, and that some ICOs must be registered to operate legally. Also, tokens may be called by many other names in the cryptocurrency market.

To protect investors, the SEC has been actively cracking down on fraudulent and unregistered ICOs.

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