The Securities and Exchange Commission was slow to take action last year as dozens of companies held so-called “initial coin offerings” or ICOs, which involve selling cryptocurrency tokens to the public. But now, the agency appears to be making up for lost time.
On Friday, the SEC announced it had reached settlements with Boston-based Airfox, which raised $15 million selling tokens related to online advertising, and with Paragon Coin, which raised $12 million to bring blockchain technology to the cannabis industry.
The companies landed in regulatory hot water because they conducted their ICOs after the SEC issued a landmark report last July warning that such offerings amounted to selling unlicensed securities.
“We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities,” said Stephanie Avakian, co-director of the SEC’s Enforcement Division, in a statement. “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.”
Under the terms of the settlements, the companies will each have to pay penalties of $250,000 and also to compensate investors who purchased unlicensed securities.
It’s unclear if those investors lost money or how the companies will go about compensating them. In a flurry of ICOs that occurred in 2016 and 2017, the price of the tokens often increased dramatically as part of a larger speculative mania. The price of many tokens has since collapsed 90% amidst the popping of the crypto bubble, and as many of the projects touted in the ICOs have failed to materialize as promised.
Some people familiar with the cryptocurrency industry predict Friday’s announcement will be just the beginning of an enforcement wave:
The SEC is working their way up the ICO totem pole, starting with the most obvious and easiest targets until they have the accumulated weight of caselaw to tackle the big ones. They don't want another SAC Capital Advisors debacle.
— nic "bankful" carter (@nic__carter) November 16, 2018
Rumors of an enforcement crackdown has also been cited as a possible explanation for a collapse in crypto prices earlier this week.
Airfox tried to put a brave face on Friday’s news, sending reporters a press release describing the event as a “historic milestone” and stating that the “new regulatory framework should allow Airfox to pursue its ultimate goal of global financial inclusion.”