The recent crackdown on two initial coin offerings (ICOs) Paragon and AirFox by the U.S. Securities and Exchange Commission (SEC) could lead to many blockchain and crypto projects declaring bankruptcy in the coming months.
As CCN reported on November 16, Paragon and AirFox were ordered to pay a $350,000 fine to the U.S. SEC and refund investors who participated in the token sale.
The problem for the two tokens is that they have been asked by the US SEC to refund $12 million and $15 million respectively to investors, and since their ICOs, the prices of cryptocurrencies including Bitcoin and Ethereum have declined substantially and blockchain projects have used most of their funds garnered in the token sales to fund operations.
“Both companies have agreed to return funds to harmed investors, register the tokens as securities, file periodic reports with the Commission, and pay penalties,” the official SEC document read.
A more serious issue for ICOs is that as the SEC reaffirmed in its document, investors in ICOs considered securities under the existing guideline of the SEC have the right to sue projects to be compensated for their losses.
As such, if an investor invested in a token and recorded an 80 percent loss, for instance, the investor isi technically elligible to file a lawsuit against the initiator of the token sale to receive the funds back.
“On a date no later than sixty (60) calendar days… distribute by electronic means reasonably designed to notify each potential claimant, notice and a claim form, both of which shall be in a form not objected to by Commission staff, informing all persons and entities that purchased PRG potential claims under Section 12 (a) of the Securities Act, including the right to sue “to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if [the purchaser] no longer owns the security.”
Upon the crackdown on Paragon and AirFox, Stephanie Avakian, the co-director of the SEC’s Enforcement Division heavily emphasized that the SEC will continue to investigate token sales that have violated federal security laws with the intent of bringing down ICOs considered as securities by the SEC.
“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. 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.”
US Ecosystem Should be Avoided
In the US at least, tokens and ICOs have two choices: either completely block out investors from the US participating in ICOs or cooperate with the SEC to distribute tokens as a registered security.
There are several regions, including South Korea, that are considering the legalization of ICOs to facilitate the growth of the local blockchain sector.
Past ICOs that have initiated token sales for US investors could be vulnerable to class action lawsuits demanding payouts for the losses investors suffered throughout the last eleven months of the bear market, which could lead many ICOs to bankruptcy.