Actions against initial coin offerings are back in the spotlight with the Securities and Exchange Commission and Massachusetts’ top securities regulator settling charges with Airfox for selling unregistered securities.
According to the SEC’s orders, both CarrierEQ Inc. (Airfox) and Paragon Coin Inc. conducted ICOs in 2017 after the commission warned that ICOs can be securities offerings in its DAO Report of Investigation.
The SEC states that the two companies sold digital tokens in ICOs.
The two cases mark the first time the SEC has imposed civil penalties solely for ICO securities offering registration violations.
Boston-based ICO issuer Airfox agreed to register its so-called “AirTokens” as a class of securities with the SEC and offer compensation to ICO purchasers.
AirFox also agreed to pay a $100,000 penalty to Massachusetts.
Airfox 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, according to the SEC.
“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, in a statement. “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.”
The SEC orders impose $250,000 penalties against each company and include undertakings to compensate harmed investors who purchased tokens in the illegal offerings.
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, the SEC states.
Neither Airfox nor Paragon registered their ICOs pursuant to the federal securities laws, nor did they qualify for an exemption to the registration requirements.
“As I said when my office first began its sweep of ICOs last year, there is little question that many of these ICOs constitute securities offerings which need to be registered or exempt from registration in the Commonwealth,” said William Galvin, Massachusetts secretary of state. “My office will continue to aggressively police these offerings in Massachusetts to protect our investors.”
Though the terms of Airfox’s ICO required purchasers to agree that they were buying AirTokens as a utility in exchange for mobile data and not as an investment or security, AirFox primarily aimed its promotional efforts for the ICO at digital token investors rather than anticipated users of AirTokens, Galvin’s office explained.
Investors in AirTokens reasonably expected to profit from their investment, the consent order states.
Galvin’s office opened its investigation into Airfox in December 2017, as part of the office’s initial sweep of entities raising money through ICOs in Massachusetts.
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