SEC on ICOs: Repentance, Registration and Rescission

Blockchain & E-Transactions Law

Last Friday, November 16, the SEC issued a pair of settled actions setting a de facto standard of compliance for unregistered ICOs wanting to "come in from the cold." In each of them, the ICO offeror paid a $250,000 monetary penalty, registered its ICO as security, and entered a rescission undertaking respecting all tokens issued to date.

The first was a settled action by Paragon Coin - a digital token ("PRG") unregistered offeror in the cannabis industry. Paragon agreed to cease and desist, file a registration statement, and publicly offer rescission of the ICO. The Commission cited Paragon's cooperation and remediation in imposing no greater monetary penalties than $250,000.

In the Matter of Paragon Coin, Inc., Rel. No. 33-10574 (SEC Nov. 16, 2018), is here.

The second, more significantly, involved a purported "utility" token, that was promoted as functioning within a closed ecosystem. Some have thought of utility tokens - exchangeable for goods or services, akin to a prepaid calling card - as perhaps a way to avoid being a "security" under the familiar Howey test.

The Howey investment-contract test finds an arrangement to be a "security" where it involves: (1) an investment of money (or other value, including another digital asset, In re Munchee Inc., Rel. No. 34-10445 (SEC Dec. 11, 2017); (2) in a common enterprise; (3) with an expectation of profits; (4) to be derived from the entrepreneurial or managerial efforts of others. SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946); see also United Housing Found., Inc. v. Forman, 421 U.S. 837, 852-53 (1975).

CarrierEQ, a mobile technology company sold discounted airtime or data in return for advertising feeds on its AirFox app on cell phones. CarrierEQ conducted an ICO of AirTokens as a so-called utility token within its business ecosystem. The AirTokens raised capital for CarrierEQ to build out its ecosystem and could be exchanged for data and digital services and physical goods. Critically, though, CarrierEQ described its managerial efforts in building out its ecosystem as leading to increased demand and thus appreciation in the value of AirTokens and a facility for their secondary market trading. These factors lead the Commission to find the AirTokens were "securities."

As in Paragon, the Commission relied on the respondent's cooperation and remediation in not imposing sanctions greater than the $250,000 monetary penalty. CarrierEQ agreed to register its tokens as securities and publicly offer rescission of its ICO.

In the Matter of CarrierEQ, Inc., d/b/a AirFox, Rel. 33-10575 (SEC Nov. 16, 2018), is here.

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