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.
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