The SEC’s Right, ICOs Are Unregistered Securities And Compensation Is Due

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There really shouldn’t be any surprise with this ruling from the Security and Exchange Commission over the Paragon and AirFox initial coin offerings. They were unregistered securities, ones that should have been registered. Thus the usual panoply of rules comes into effect. A fine, obviously enough, but also restitution of funds. Which is a significant problem given that the overall market has fallen since they were launched.

The SEC has been telling everyone what the rules were for some time now. You can sell pretty much anything you want. And you can certainly give stuff away. You can even sell or give away stuff that you say will rise in value. But when you also say that you’ll be doing work, work which may or may not work, to increase that future value then that’s a security. And must be registered before you’re allowed to sell it to people.

Note the distinction there. If we issued Continentals and said they’d go up in value just because people love us then that’s fine. We can even sell them. If we say they’ll go up in value because the Continental Telegraph is about to overtake the NY Times – to the extent it hasn’t already – then the work we do here makes those ConTelCoins a security and we’ve got to register with the SEC before we sell them. That’s just how it works:

The recent crackdown on two initial coin offerings (ICOs) Paragon and AirFox by the U.S. Securities and Exchange Commission (SEC) could lead to many blockchain and crypto projects declaring bankruptcy in the coming months.

As CCN reported on November 16, Paragon and AirFox were ordered to pay a $350,000 fine to the U.S. SEC and refund investors who participated in the token sale.

The problem for the two tokens is that they have been asked by the US SEC to refund $12 million and $15 million respectively to investors, and since their ICOs, the prices of cryptocurrencies including Bitcoin and Ethereum have declined substantially and blockchain projects have used most of their funds garnered in the token sales to fund operations.

There’s an interesting trick there. If people paid in Ethereum then perhaps they only need to get Ethereum back. So, whether the ICO can refund depends on what they did. If they converted everything to cash they might be able to buy back and refund now. If they didn’t well, if they didn’t they’re screwed. Doesn’t change the basic illegality as Martin Shkreli found out. Dodgy dealing is dodgy dealing, even if investors profit in the end.

In a self-described “first,” the U.S. Securities and Exchange Commission (SEC) has imposed civil penalties against two Initial Coin Offerings (ICOs) solely over their failure to register their token sales, according to an official Nov. 16 press release.

The SEC states it has reached settlements with two ICO companies, CarrierEQ Inc. (Airfox) and Paragon Coin Inc., both of whom reportedly conducted their token sales last year after the SEC had already “warned” that ICOs could be deemed securities offerings in its July 2017 DAO Report of Investigation.

They were warned, the law had already been clarified, ignorance is not an excuse.

The regulator had warned in March that it would hold most token offerings to the same standards as securities offerings, and impose fines on bad actors that violated securities laws.

Really, it’s all been quite clear since then. An ICO may or may not be a security the way the SEC defines it. If it is, and you don’t register it, do all the paperwork, then you will get dinged.