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SEC found two companies liable for ICO

On November 16, 2018 the U.S. Securities and Exchange Commission (SEC) fined two companies – Paragon Coin, Inc. and CarrierEQ, Inc. (AirFox) – for violating the Securities Act of 1933. Previously, the SEC pursued only fraudulent ICO. The exception was the early case of Munchee, Inc., which, at the request of the SEC, stopped its ICO and returned all raised funds to investors.

Paragon company offered tokens to raise capital and implement its business plan, which was to add blockchain technology to the cannabis industry and contribute to the legalization of cannabis. The company assured, that the value of tokens would increase as a result of its activities and tokens would be sold in secondary markets. As a result of ICO, the company received digital assets valued at approximately US$12 million.

AirFox received digital assets valued at US$15 million as a result of ICO, the purpose of which was to obtain funding for the development of “ecosystem” consisting of mobile application, that could be used to earn tokens and exchange them for data through viewing advertisements.

Both companies mentioned the possibility of making profit and trading in secondary markets, that led the SEC to the conclusion, that tokens fell under the definition of securities. Following the analysis of the companies’ activities, the SEC reached the conclusion, that the tokens of these companies were securities and companies had to register token offering under the federal securities laws or try to qualify them as an exception to the registration requirement.

Each company was fined US$250,000 and obliged to provide compensations to investors, who had purchased tokens. Companies must also register their tokens as securities and submit periodic reports to the Commission for at least one year. Airfox and Paragon agreed to these sanctions without recognizing or denying the charges.

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