by Joseph A. Hall, Michael Kaplan, Edmund Polubinski III, Byron B. Rooney, and Ryan Johansen 

In a pair of settled enforcement actions announced on November 16 in which it concluded that initial coin offerings conducted by Paragon Coin, Inc. (PDF: 232 KB) and AirFox (PDF: 223 KB) were illegal unregistered securities offerings, the SEC imposed an agreed-upon remedy that it will likely seek to use as the template for resolving its backlog of investigations into recent ICOs. Significantly, both ICOs took place after the SEC issued its July 2017 Section 21(a) report (PDF: 168 KB) addressing a crypto-token offering by The DAO, where the SEC warned the market (PDF: 169 KB) that some ICOs may violate the federal securities laws.

Neither Paragon nor AirFox agreed to conduct a “rescission offer” whereby the company would offer to repurchase the illegally offered tokens and any investor who declined the offer would retain freely tradable tokens (a remedy that Google undertook shortly after its IPO in order to resolve claims that certain pre-IPO compensatory equity grants were made in violation of the registration provisions of the Securities Act of 1933). Instead, each company agreed to distribute a “claim form” to all token purchasers offering return of the consideration paid, plus interest, in exchange for tender of the tokens, or offering damages to token purchasers who no longer hold their tokens. Purchasers of tokens located outside the United States are apparently not excluded from participation. Each company was also fined $250,000 and required to register its token as a security and become an SEC-reporting company for at least one year. Continue reading →