SEC Fails To Enforce Fines And Penalties On Failed ICOs

Three startups have missed deadlines to pay back investors or provide more transparency. SEC Fails To Enforce Fines And Penalties On Failed ICOs

Regulators’ efforts to push cryptocurrency startups to comply with laws governing fundraising may be faltering, as several firms that agreed to fix past misdeeds missed deadlines to repay investors or provide more transparency.

The firms collectively raised about $40 million through illegal sales of digital tokens during the height of the cryptocurrency boom in 2017, when over $5.4 billion was raised. In exchange for paying lower fines, the companies were supposed to meet the Securities and Exchange Commission’s fundraising rules. The agency touted the pacts as a template for resolving similar cases.

But two of the companies missed their original deadline last month to repay people who bought their tokens. A third startup is more than five months behind its target date for giving investors information needed to judge whether to seek a refund. All three say on their websites the SEC has given them more time to do the work, although the regulator doesn’t itself disclose that.

An SEC spokeswoman declined to comment.

The missed deadlines highlight the dilemma that Washington faces in regulating cryptocurrency developers. The SEC believes many crypto assets are securities, making them subject to investor-protection laws. But the agency also wants to leave room for technology-oriented startups to improve the capital-raising process, potentially making it cheaper and more efficient for all.

Two of the startups—Airfox and Paragon Coin Inc.—agreed to pay fines of $250,000 each when they settled with the SEC in November 2018. The deals didn’t accuse the firms of fraud. Instead, the SEC charted a path for the companies to make amends by bringing their initial coin offerings, or ICOs, under SEC oversight and offering refunds to investors.

“These orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws,” Steven Peikin, co-director of SEC enforcement, said at the time.

The SEC still regards the settlements as an approach that could be used in other cases, according to a person familiar with the agency’s thinking.

The SEC has extended deadlines in some other cases where companies were ordered to improve their governance or internal compliance systems, the person said.

Airfox offers mobile banking to people in developing countries, including Brazil. Paragon said it is applying the database technology behind cryptocurrencies to the cannabis industry. Paragon enlisted the Game, a rapper with a noted fondness for weed, to tout its coin sale in 2017.

A third company, Gladius Network LLC, didn’t pay a penalty when it settled. The SEC gave the company credit for self-reporting its violations.

As a first step toward compliance, the companies were required to submit a registration statement, a filing regulated by the SEC that informs investors of risks, trends and financial performance.

Airfox and Paragon filed the disclosures. Paragon failed to answer an SEC letter with dozens of follow-up questions about its accounting and the shareholder rights that come with its tokens, according to agency filings. It also hasn’t issued any quarterly updates for investors since registering its tokens in March, according to SEC data.

Gladius’s settlement called for filing its registration statement by May 20, 2019. Its website says the deadline was extended until Nov. 18. An attorney for Gladius declined to comment.

Airfox and Paragon were supposed to pay back investors seeking refunds by Oct. 16 but missed that deadline. Airfox said it received an extension until Dec. 28 to complete the payback.

“Airfox has complied with all applicable deadlines, some of which were extended,” the company said in a statement.

Paragon’s website says investors wanting refunds are due to submit their claims by Nov. 21. The original deadline was July, according to the settlement order. Paragon didn’t respond to a request for comment, nor did an attorney who represented the firm before the SEC.

Neither company may have enough cash to issue the refunds, if most of the original investors want their money back. Airfox owes as much as $15.4 million to buyers of its tokens and has $6.1 million in current assets, including $5.4 million in cash, according to SEC filings.

Paragon disclosed current assets of $95,659 and current liabilities of $14.9 million, according to figures for 2018 filed with the SEC. It plans to generate cash by selling a building it owns in Los Angeles and raising more capital from investors.

Michael S. Dicke, a former SEC enforcement lawyer and now a partner at Fenwick & West LLP, said he was skeptical that many crypto projects would be able to follow the SEC’s template for mending their financing missteps.

“I looked at it then and look at it now as impractical, because for many projects they spent the money in accordance with what they told purchasers they would spend the money on—to build out the project,” he said. “This kind of remedy really only works well when the issuer can pay back” in full.

Updated: 11-25-2019

Unregistered ICO Issuer Gladius Shuts Down 9 Months After SEC Settlement

Crypto startup Gladius Network LLC announced it would close its operations via a Telegram message on Thursday, several months after settling charges of selling an unregistered security with the U.S. Securities and Exchange Commission (SEC).

The Washington D.C.-based firm reached a settlement with the SEC in February over its 2017 initial coin offering. As part of the settlement, Gladius was supposed to refund investors who participated in the $12.7 million sale. The regulator said it would not impose any penalty on Gladius because the firm self-reported the token sale.

As part of the settlement, Gladius was required to file a registration statement by May 20, 2019, according to the Wall Street Journal. While the deadline was extended to Nov. 18, it is unclear whether the company actually filed the statement.

“Despite our best efforts, the company no longer has funds to continue operations,” the firm said in the announcement last week. “We regret to inform you that Gladius Network LLC has ceased operations effective immediately.”

The company plans to leave its code on GitHub for the next three months, allowing anyone who is interested to work on their own version of the project.

“We still believe in the power of our technology, and if anyone in the community is interested in pursuing it we welcome it,” Gladius said.

Gladius started to sell its GLA tokens in exchange for ether in October 2017, and aimed to incentivize people to use its network. The firm raised nearly 24,000 ETH when it completed the token sale in December that year, according to a press release from the SEC.

In November 2018, the SEC charged two crypto startups – CarrierEQ Inc., also known as Airfox, and Paragon Coin Inc. – with violating security registration requirements for their ICOs.

The two firms later agreed to register the ICOs as securities after settling these charges. The regulator said Airfox and Paragon Coin are among the first cases “imposing civil penalties solely on securities offering registration violations. (The Journal reports that both companies failed to pay the fines on time, though Airfox claims its deadline was extended through the end of December.)

Updated: 12-9-2019

US SEC Seeks to Reopen Case Against Bitcoin Fraudster, Seeks Penalties

The United States Securities and Exchange Commission (SEC) has filed to reopen a case against Bitcoin (BTC) fraudster Renwick Haddow as he has not resolved the regulator’s claims for monetary relief against him.

On Dec. 6, The agency submitted a letter to Judge Lorna G. Schofield of the New York Southern District Court requesting to reopen the case against Haddow. Last year, the SEC accused Haddow of defrauding Bitcoin investors out of over $37 million. The court found him guilty in June of 2019.

Claims Against Haddow

In the letter, the SEC notes that the court gave a partial consent judgment on Haddow on Sept. 10, 2019, after which Judge Schofield closed the case on Dec. 5.

The SEC states that the consent judgment and case closure left its claims for monetary penalties unsettled. The SEC expects to either reach an agreement on monetary relief or move to seek monetary relief should the court reopen the case.

As Cointelegraph previously reported, Haddow was extradited from Morocco to the U.S. and appeared in a Manhattan District Court last April. The Department of Justice claimed that Haddow “misappropriated investor funds” and “made false and misleading representations” to investors in Bitcoin Store, Bar Works and related schemes from November 2014 to June 2017.

Recent Crypto-Related Crime Schemes

In November, the New York Southern District Court ruled in favor of the U.S. government to intervene in a civil case against Jon Barry Thompson, who is charged with “knowingly or recklessly making false representations to customers in connection with the purported purchase of Bitcoins worth over $7 million.”

Also last month, news broke that Dennis Blieden — a former executive of a Hollywood-based digital marketing firm — had pleaded guilty to wire fraud and identity theft. Blieden embezzled over $22 million from his employer and used the stolen funds to buy cryptocurrency, gamble and cover personal expenses.

Updated: 12-18-2019

Crypto Startup Accused of Illegal Fundraising Ordered To Refund Investors

Blockchain of Things raised nearly $13 million at peak of investor demand for unregulated cryptocurrencies.

A technology startup that raised nearly $13 million at the peak of investor demand for unregulated cryptocurrencies agreed to pay a fine and provide more transparency about its finances and business plan.

Blockchain of Things Inc. also agreed Wednesday to offer its original investors their money back, a feature of other settlements the Securities and Exchange Commission has reached with crypto startups whose fundraising efforts were deemed illegal.

While the company could face millions in investor refunds, the cost of the settlement depends on how many investors respond. Many traders who bought cheap tokens during the heyday of 2017’s bitcoin boom, hoping to score quick gains, may not respond to a claims process to seek compensation.

The company also said the SEC gave it a waiver that allows it to efficiently raise money from private investors in the U.S., in transactions that are typically unregulated.

Under the agreement that Blockchain of Things reached with the SEC, the company will pay a $250,000 fine without admitting or denying the SEC’s allegations and assume most of the disclosure obligations that public companies face. It will have to disclose its finances in a regulatory filing known as a registration statement and update investors quarterly on its financial condition.

Blockchain of Things didn’t offer “investors with the information they were entitled to receive in connection with a securities offering,” said Carolyn Welshhans, as associate director for enforcement at the SEC. “We will continue to consider appropriate remedies, such as those in today’s order, to provide investors with compensation and required information.”

Blockchain of Things sold its digital tokens, a financing method similar to selling stock, even after the SEC warned in 2017 that startups were skirting investor-protection rules by using the tactic, the agency said.

The firm’s token sale mostly involved overseas investors, showing how the SEC’s enforcement actions in the cryptocurrency market continue to target cross-border deals. Blockchain of Things raised just $600,000 from U.S. investors, while raising over $12 million from token purchasers overseas, according to a settlement order and the company’s chief executive officer.

The tokens sold to non-U.S. investors didn’t have any restrictions to prevent them from being resold to American investors, according to the settlement order. The firm eventually sold tokens to more than 1,380 people, the order says.

Blockchain of Things provides technology tools to help other companies that want to build applications for the computer network that powers bitcoin, the world’s most valuable cryptocurrency. In a statement, the New York-based company said its settlement “gives Blockchain of Things the path forward to full compliance with the U.S. securities laws and clears the way for Blockchain of Things to pursue its continued vision.”

Three other startups whose token sales were deemed illegal by the SEC earlier agreed to similar settlements to end enforcement investigations.

In one case, Boston-based Airfox announced Tuesday that only 174 of 2,500 token investors responded to a claims process offering refunds. The company said it would pay about $3.3 million to 163 investors with valid claims, according to a regulatory filing. Airfox raised about $15 million when it sold its digital token in 2017.

Airfox has the cash to pay the claims and continue to do business, the filing stated. But one other startup, Gladius Network LLC, called it quits after burning through millions and struggling to meet the terms of its settlement with the SEC.

Bitcoin Information & Resources (#GotBitcoin?)

Family Offices Finally Accept The Benefits of Investing In Bitcoin

An Army Of Bitcoin Devs Is Battle-Testing Upgrades To Privacy And Scaling

Bitcoin ‘Carry Trade’ Can Net Annual Gains With Little Risk, Says PlanB

Max Keiser: Bitcoin’s ‘Self-Settlement’ Is A Revolution Against Dollar

Blockchain Can And Will Replace The IRS

China Seizes The Blockchain Opportunity. How Should The US Respond? (#GotBitcoin?)

Jack Dorsey: You Can Buy A Fraction Of Berkshire Stock Or ‘Stack Sats’

Bitcoin Price Skyrockets $500 In Minutes As Bakkt BTC Contracts Hit Highs

Bitcoin’s Irreversibility Challenges International Private Law: Legal Scholar

Bitcoin Has Already Reached 40% Of Average Fiat Currency Lifespan

Yes, Even Bitcoin HODLers Can Lose Money In The Long-Term: Here’s How (#GotBitcoin?)