WASHINGTON – Two startups that raised money last year through cryptocurrency sales agreed to abide by the rules of investor protection and to offer money to thousands of people who bought their digital tokens, marking a new phase in the clash of the government with initial offers of coins.
The agreements with the Securities and Exchange Commission, announced on Friday, involve two cryptocurrency companies, Paragon Coin Inc. and CarrierEQ Inc. In a first phase, both agreements require companies to submit audited financial statements and other information on their activities, providing information that investors generally decide if a security is a good investment.
Paragon and CarrierEQ, which have conducted unlisted coin deals, have agreed to pay $ 250,000 in civil penalties and to notify investors that they are entitled to redemptions if they still own the token or can prove they have sold it at a loss. The CarrierEQ coin offer reached 2,500 buyers.
Paragon, founded by a former model, organized a widely-recognized currency sale in August 2017 that raised about $ 12 million, according to the SEC. The company said it would merge the blockchain, the technology behind virtual currencies, with the marijuana industry. The launch was launched at a time when many initial coin offers used athletes and other celebrities to generate interest. Paragon enlisted the game, a rapper, to publicize his coin.
CarrierEQ, also known as Airfox, has raised about $ 15 million, the SEC said. The founders of the startup boasted of having previously worked for Google and said they had taken measures to comply with anti-money laundering rules. Airfox said that its token would be a reward for users who shared data with mobile advertisers.
In both cases, the SEC claimed that the tokens were securities or investments whose return would be derived from the success of the startup. As a result, sales should have been registered with regulatory authorities.
The registration process involves the hiring of auditors and lawyers to prepare a detailed financial disclosure, similar to a prospectus in an initial public offering, to be submitted to the SEC and given to investors.
SEC orders do not accuse Paragon or Airfox of fraud. The charges are similar to a 2017 agreement reached with another company, Munchee Inc., which came shortly after the SEC had warned that it would settle token sales as stock offers.
In the context of the agreement, both Paragon and Airfox must prepare an initial briefing within 90 days and provide investors with quarterly updates on their financial conditions. This will require the use of auditors, an almost non-existent layer of protection in the world of cryptocurrencies, who hoped to bypass Wall Street brokers and rely on community programmers to distribute tokens and verify operations.
Both Paragon and Airfox have neither admitted nor denied the SEC's claims.
The regulators have more than 100 investigations on companies related to cryptocurrency, said SEC security co-director Stephanie Avakian at a conference last week. The agency believes that the terms of the agreements with Paragon and Airfox may be a model for solving investigations into other coin sales that do not involve fraud, according to a person familiar with the agency's thinking.
Write to Dave Michaels at [email protected]