The U.S. Securities and Exchange Commission (SEC) announced on Friday that CarrierEQ Inc. and Paragon Coin Inc. have settled the charges leveled against them for violating laws guiding initial coin offering (ICO) securities offering. According to the press release, the companies also agreed to return funds to harmed investors, register the tokens as securities, file periodic reports with the commission, and pay penalties.
The United States securities regulator said that despite their warning neither company registered their ICOs as securities before offering them to investors and both companies were not also qualified for registration exemptions.
Now what is ICO all about and why would these firms violate SEC regulations? Let’s begin with what ICO is. Initial coin offering (ICO) refers to the cryptocurrency space equivalent to an initial public offering (IPO) in the normal investment world. ICOs are basically for fundraising. When a company intends to create a new app or service, it can raise funds through the creation of a digital coin. Interested investors then buy the digital coin – with fiat currency or other digital tokens if possible – with the aim to sell later at a higher price.
Investors who buy such offering are now holders of a new cryptocurrency specific to the ICO (something very similar to a shareholder) while the crypto firm uses the investors’ funds to further its goals and launch its products.
Earlier in the year, the Securities and Exchange Commission (SEC) made it known that virtually all tokens are securities because many crypto firms are now hiding under the shield of an ICO in a bid to circumvent federal securities laws. To further strengthen the law, the SEC created a cryptocurrency task-force headed by members of the SEC Division of Enforcement to enforce federal securities laws and seek disgorgement and money penalties for any misconduct by crypto firms. The primary goal of the task force is to ensure that all token issuers comply with federal securities laws as they develop their platforms.
According to the SEC, both CarrierEQ Inc (Airfox) and Paragon Coin Inc. conducted ICOs in 2017 even after the DAOR Report of Investigation clearly stated that ICOs would be henceforth treated as securities.
The press release issued on November 16 showed that a total sum of $15 million worth of digital assets was raised by Airfox, a Boston-based startup, to finance its project. The company claims that the project, which is the development of a token-denominated ecosystem, would allow users in future markets to buy and exchange tokens for data by interacting with advertisements.
Meanwhile, $12 million worth of digital assets was raised by Paragon, an online entity, through the ICO securities offering. The management claimed that the money would be used to develop and implement its business plan which involves the addition of blockchain technology to the cannabis industry and working towards the legalization of cannabis.
Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, reiterated that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities.
She also added that these cases would serve as a warning to crypto firms who are considering taking similar actions. She emphasized that the SEC will continue to be on the lookout for violations of the federal securities laws with respect to digital assets. The U.S. SEC also noted that these two cases are their first cases imposing civil penalties solely for ICO securities offering laws violations.