Two cryptocurrency startups have agreed to register their initial coin offering (ICO) tokens as securities after settling charges with the U.S. Securities and Exchange Commission.
The SEC’s Friday announcement centered on two firms: CarrierEQ Inc., also known as Airfox, and Paragon Coin Inc., both of which conducted token sales last year. Airfox raised $15 million through its sale, while Paragon raised $12 million, according to statements.
The U.S. securities regulator contended that neither startup registered their ICOs as securities offerings, and neither qualified for registration exemptions. In addition to registering their tokens as securities, both companies will refund investors, file periodic reports to the SEC and pay $250,000 apiece in penalties.
The SEC’s statement noted that these two cases are the SEC’s “first cases imposing civil penalties solely for ICO securities offering registration violations.”
SEC Enforcement Division co-director Stephanie Avakian said that the agency has “made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities.”
“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 release further referenced the Munchee ICO, which the regulator halted last December. Like Airfox and Paragon, Munchee agreed to refund investors in its $15 million token sale, though the SEC did not impose additional fines at the time.
Friday’s announcement comes on the heels of the SEC revealing settled charges against Zachary Coburn, founder of the decentralized exchange EtherDelta, with running an unregistered securities exchange.
At the time, an individual familiar with the SEC’s thinking noted that the regulator is likely to focus increasingly on token trading platforms.
This post credited to coindesk Image via Shutterstock
Dutiful CCN readers may recall this journalist’s questioning of the Paragon ICO over a year ago. Paragon responded to that article with legal threats, as noted in the author’s subsequent analysis of the initial coin offering in question. Now that some time has gone by, and the whole market capitalization of Paragon is about a third of what the company raised during the ICO, the government has stepped in, knocked heads, and forced some changes within Paragon.
According to a press release today from the Securities and Exchange Commission, both Paragon and another company doing business as Airfox (officially registered as CarrierEQ) have reached settlements with the agency for failure to register their tokens as securities or their token sales as securities offerings. It is a crime in the United States since 1934 to sell virtually anything that can resemble an investment contract without first registering with the SEC or applying for an exemption. The Securities Act of 1934 was one of many pieces of legislation designed to prevent future crashes on the order of the crash of 1929, which led to what is historically referred to as the “Great Depression.”
Each firm has agreed to a settlement of $250,000 and several important items of responsibility. First and most notable, all affected investors in either company have an opportunity to request a refund.
Given that Paragon, for example, sold $12 million in tokens but PRG has a sum market capitalization of not quite $3,000,000, it would seem there will be people interested in pursuing as much. Whether this leads to bankruptcy for Paragon, time will tell, but surely they’d prefer that to the various other penalties a government inquiry can bring on (such as jail time.)
The SEC press release on the subject reads:
“The orders impose $250,000 penalties against each company and include undertakings to compensate harmed investors who purchased tokens in the illegal offerings. The companies also will register their tokens as securities pursuant to the Securities Exchange Act of 1934 and file periodic reports with the Commission for at least one year. Airfox and Paragon consented to the orders without admitting or denying the findings.”
The SEC settlement documents illustrate a somewhat-disconcerting accuracy on the part of the agency, which has only previously prosecuted one non-fraud ICO case (a company called Munchee which simply backed out upon contact, giving all the funds back). Point 17 in the Paragon document illustrates a familiarity with token technicalities:
“PRG tokens were distributed to purchasers on October 22, 2017, on the Ethereum blockchain using the ERC-20 protocol.”
It seems that Ethereum tokens are not just for eccentric investors anymore.
SEC Enforcement Co-Director Steven Peikin believes that its enforcement actions against Airfox and Paragon will help stimulate the registration of other US-based ICOs in advance of any further non-fraud prosecution, saying:
“By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws.”
Twitter was abuzz with the news at the time of writing, with many ICO skeptics taking a victory lap.
Landmark case today. This is going to happen hundreds and hundreds of times in the next 2-3 years until all the ICOs are gone.
Nov. 2: Cryptocurrency markets have continued trading slightly in the green today, remaining relatively quiet with moderate gains throughout the top 20 coins. Most of the top 100 digital currencies have experienced humble gains over the past 24 hours.
The leading cryptocurrency Bitcoin (BTC) is up only 0.06 percent on the day, and is trading at around $6,395 as of press time. BTC has seen slight volatility during the day, with the deepest and highest points of $6,327 and $6,396 respectively.
Ethereum (ETH) is up by slightly almost 1 percent over the last 24 hours, trading around $200, and the altcoin’s weekly chart showing its price decreasing by a relatively modest 0.41 percent. After dipping to its weekly low of $193.29 on Oct. 31, ETH has been steadily gaining in price.
The third largest cryptocurrency by market cap Ripple (XRP) is up by 0.57 percent over the last 24 hours, and trading around $0.459 at press time. Over the past seven days, XRP is down by 0.06 percent.
Bitcoin Cash (BCH) has stood out among other top 10 coins, making gains of 9 percent on the day. The altcoin is trading at around $462, while its daily trading volume is around $522 million, according to CoinMarketCap. On its weekly chart, BCH rose to as high as $469 following a dive to $411.
During the last week, total market cap has seen some notable fluctuations, with a sudden dive to $202 billion and surge to $209 billion on Oct. 29 and Nov. 1 respectively. After jumping to as much as $209 billion yesterday, total market capitalization dropped to $205 billion, after which it saw moderate gains today.
The industry has been awaiting the decision of the U.S. Securities and Exchange Commission (SEC) regarding the review of proposed rule changes related to a series of applications to list and trade various BTC Exchange-Traded Fund (ETFs) set for Nov. 5.
Yesterday, the so-called “godfather of ETFs” Reggie Browne said that Bitcoin ETFs will be certified “no time soon.” He specified that Bitcoin ETFs will be approved only after the development of a strong regulatory framework for the industry.
The Securities and Exchange Commission said Tuesday that it has asked a U.S. district court to enforce a subpoena as part of a probe into alleged pump-and-dump tactics that involved claims of a $100 million initial coin offering (ICO).
According to the October 9 statement, officials at the U.S. regulator are investigating Saint James Holding and Investment Company Trust and its trustee, Jeffre James, months after the agency first moved to suspend trading in penny-stock company Cherubim Interests, Inc.
The SEC explained that it believes Cherubim lied to investors about its claims around the so-called SJTCoin, which it said in January was “designed for cooperative living, working and healthier lives and offers extensible diversity in the use of the coin over current coins like Bitcoins for both financial and societal gain.”
The agency said in its Tuesday statement:
“Based on its ongoing, nonpublic investigation, the SEC has reason to believe that to ‘pump’ its stock price, Cherubim issued false public statements in January 2018 claiming that the company had executed a $100,000,000 financing commitment to launch an initial coin offering (‘ICO’) for St. James Trust. After Cherubim’s stock price and trading volume increased on this news, certain individuals associated with the company may have ‘dumped’ their overvalued Cherubim stock for significant profits.”
Yet to date, James and the St. James Trust have yet to respond to the subpoena, despite “personally [serving] James with copies of the subpoenas.”
“The SEC’s application seeks an order from the court compelling James and St. James Trust to produce all responsive documents,” the agency said.
At the start of the year, the SEC made waves as it moved to scrutinize a number of small-cap stocks that rode a wave of public interest around blockchain, having warned in August 2017 that it would seek to punish public companies that use ICO-related claims to hoodwink investors.
This post credited to coindesk Image via Shutterstock
The U.S. Securities and Exchange Commission (SEC) said Tuesday that it has charged and reached agreements with two companies and their owners that operate in the cryptocurrency space.
The securities regulator alleged that Crypto Asset Management LP (CAM) and its principal, Timothy Enneking, had marketed itself under false pretenses, alleging that Enneking raised more than $3 million in late 2017 and claimed that the company was “the first regulated crypto asset fund in the United States.”
According to the SEC statement, Enneking and the company agreed to the SEC’s cease-and-desist order and will pay a penalty of $200,000, without admitting or denying the agency’s findings. Enneking didn’t immediately respond to a request for comment.
Although this isn’t the first time the SEC has issued cease-and-desist letters to companies operating in the crypto space, it is the first that found fault with registration statements made by a cryptocurrency investment company.
Separately, the SEC accused TokenLot LLC and its owners, Lenny Kugel, and Eli L. Lewitt, of acting as unregistered broker-dealers. The agency said that TokenLot – described as a kind of “ICO Superstore” – “received orders from more than 6,100 retail investors and handled more than 200 different digital tokens, which the SEC found included securities.”
As in the case of CAM, Kugel, Lewitt and TokenLot didn’t agree to or deny the SEC’s findings, but agreed to pay $471,000 in disgorgement plus $7,929 in interest.
Lewitt and Kugel will also pay $45,000 each in penalties and “agreed to industry and penny stock bars and an investment company prohibition with the right to reapply after three years.”
“The penalties in this case reflect the prompt cooperation and remedial actions by TokenLot, Kugel, and Lewitt,” Steven Peikin, co-director of the SEC’s Enforcement Division, said in a statement.
Notably, their deal with the SEC also states that they will find “an independent third party to destroy TokenLot’s remaining inventory of digital assets.” How this process will play out is unclear at this time.
Both the SEC orders referenced its 2017 DAO report, which paved the way for a series of SEC enforcement actions against alleged fraudsters in the ICO ecosystem. At the time, the agency said that securities law in the U.S. could apply to token sales.
Since then, senior officials at the SEC, including its chairman Jay Clayton, have made ICOs a significant priority for the agency.
The SEC announced the temporary trading suspension on Sunday, while U.S. markets were closed for the weekend, claiming that “there is a lack of current, consistent and accurate information concerning” the funds, Bitcoin Tracker One (OTC: CXBTF) and Ether Tracker One (CETHF), which have been listed on Nasdaq Nordic since 2015 but have only lately been made available to U.S. investors through an over-the-counter (OTC) market.
In an announcement accompanying the formal order, the SEC said:
“The Commission temporarily suspended trading in the securities CXBTF and CETHF because of confusion amongst market participants regarding these instruments.”
Writing in the full order, SEC Secretary Brent J. Fields specifically noted that there is widespread confusion, including among broker-dealers, about whether these products are exchange-traded notes (ETNs), exchange-traded funds (ETFs), or — as the issuer claims in its filing documents — “non-equity linked certificates.”
“The Commission is of the opinion that the public interest and the protection of investors require a suspension of trading in the securities of the above quoted company,” Fields wrote.
The formal suspension will continue through Sept. 20, but the order also warns that broker-dealers can face “prompt enforcement action” if they allow clients to resume trading without exhibiting “strict” compliance to SEC regulations governing securities that trade on the secondary market.
Swedish ‘Bitcoin ETF’ Sees Low Volume Ahead of Trading Suspension
CCN reported last month that the three-year-old Bitcoin Tracker One had entered the U.S. market, providing investors with a sort of “consolation prize” since the SEC had not yet allowed a regulated domestic exchange to list an outright bitcoin ETF, and most analysts do not expect a true bitcoin ETF until at least 2019.
Both Bitcoin Tracker One and Ether Tracker One allow investors to purchase exposure to the two largest cryptocurrencies by market cap while offloading the custodial risk to the fund operator, XBT Provider, a Swedish subsidiary of U.K. cryptocurrency investment firm CoinShares. Moreover, investors can hold shares of the funds in tax-advantaged investment accounts, such as Individual Retirement Accounts (IRAs).
“Everyone that’s investing in dollars can now get exposure to these products, whereas before, they were only available in euros or Swedish krona,” Ryan Radloff, CEO of CoinShares Holdings — the parent of the company that offers the bitcoin ETN — said at the time in an interview with Bloomberg. “Given the current climate on the regulatory front in the U.S., this is a big win for Bitcoin.”
Because the two funds are listed on an actual stock exchange in Sweden, they historically have not traded at a large premium to the spot price of the underlying assets, unlike Grayscale Investments’ Bitcoin Investment Trust (OTC: GBTC), which is available through most U.S. brokerages but is not listed on any exchange.
However, because CXBTF and CETHF are technically-structured as foreign debt instruments in the U.S., they have been difficult for many investors to access through retail brokerage accounts. This, compounded with lagging consumer interest in cryptocurrency investing, prevented either fund from carving out much market share in the days following their U.S debut.
During its first several weeks in the U.S., CXBTF had an average daily volume of 31,917 shares, worth close to $1 million according to data from OTC Markets. CETHF, meanwhile, averaged a paltry ~$2,200 in daily volume.
As a result, the announcement of the temporary trading suspension had virtually no impact on the global cryptocurrency spot markets, and the bitcoin price continued to trade near $6,300 at the time of writing.
XBT Provider did not immediately respond to CCN’s request for comment.