A series of recently announced settlements relating to initial coin offerings (ICOs) show the continuing efforts of the U.S. Securities and Exchange Commission (SEC) to take enforcement action in relation to ICOs that do not comply with securities laws.
Under two settlements with companies that conducted the AirFox and Paragon Coin ICOs, the companies agreed to pay civil monetary penalties, to compensate investors who purchased tokens and to register the tokens as securities, the first time such terms have been included in ICO-related settlements. The SEC also settled with two celebrities who promoted ICOs on social media without disclosing their receipt of promotional payments from the issuers, which are the first ICO-related settlements under the anti-touting provisions of the U.S. securities laws.
In light of other recent SEC enforcement action in the U.S. federal courts, companies and individuals outside of the U.S. who have engaged in (or are considering) ICOs should not assume that the SEC’s reach will be restricted to within U.S. borders.
The AirFox and Paragon Coin settlements
The two settlements relating to the AirFox and Paragon Coin ICOs arose from substantially similar facts. AirFox allegedly raised approximately $15 million through an ICO to finance development of a token-denominated “ecosystem” that would allow users in emerging markets to earn tokens and exchange them for data by interacting with advertisements. Similarly, Paragon Coin allegedly raised approximately $12 million to develop and implement its business plan to add blockchain technology to the cannabis industry. Consistent with the SEC’s previous guidance, including the DAO Investigation Report, both settlement orders found that the ICOs were investment contracts and that the issuers had offered and sold their tokens in violation of U.S. federal securities law.
Under the settlements, both companies agreed to pay civil penalties of USD $250,000. They also undertook to offer a claims process for token purchasers to recover their respective investments and to register the tokens as securities.
Celebrity promoter settlements
The third recent settlement involved two celebrities - Floyd Mayweather Jr. and the music producer DJ Khaled - for accepting payments to promote ICOs without disclosing that they had received compensation for doing so. These are the SEC’s first settlements involving touting of ICO tokens contrary to the anti-touting provisions of U.S. securities law.
According to the settlement orders, Mayweather accepted payments from three issuers, including $100,000 from Centra Tech, whose principals are subject to prior SEC enforcement action, and DJ Khaled failed to disclose a $50,000 payment from Centra Tech.
As part of the settlements, Mayweather agreed to pay over $600,000 in disgorgement, civil penalties and interest; Khaled agreed to pay over $150,000. Both agreed to multi-year bans on promoting securities.
The potentially long arm of the SEC and U.S. Courts
These settlements, when considered together with other recently announced SEC enforcement actions, demonstrate how the SEC is pursuing companies and individuals involved in all aspects of non-compliant ICOs, including issuers, brokers, trading platforms and paid promoters. Additional settlements and enforcement actions can be expected.
As many ICOs have been conducted from outside the U.S., there are obvious questions as to whether and to what extent the SEC will pursue foreign companies and individuals that were involved in ICOs. Some indications may be found in SEC v. PlexCorps, a case in which the SEC has brought an enforcement action in the U.S. federal courts against two individuals in Quebec who orchestrated the allegedly fraudulent PlexCoin cryptocurrency offering.
In the PlexCorps case, both individuals brought motions in the U.S. federal courts to dismiss the SEC’s claims for lack of personal jurisdiction. These motions were denied on the grounds that the defendants each had sufficient contact with the U.S. and that it was reasonable to exercise jurisdiction over them. In reaching this conclusion, the U.S. court emphasized the following facts, acknowledging some were heavily disputed:
- The defendants knew U.S. residents were purchasing tokens.
- The defendants knew that steps to exclude U.S. residents from participating in the ICO were “at least somewhat ineffective”.
- To attract more purchasers, the defendants removed measures to exclude U.S. residents, for at least part of the offering period.
- The defendants relied heavily on a U.S.-based social media site to solicit potential buyers.
- The defendants registered their website with U.S. domain registrars.
- The defendants used payment processors and cryptocurrency exchanges located in the U.S. to process contributions for PlexCoin tokens.
- The defendants travelled to the U.S. at the start of the offering and the court inferred that the trip related to the offering.
These reasons suggests that it does not take significant contact with the U.S. for U.S. federal courts to conclude that they have personal jurisdiction over foreign defendants in SEC enforcement actions, at least at a preliminary stage such as a motion to dismiss.
As a result, as the SEC continues to expand the breadth of its enforcement campaign against ICOs, it remains to be seen whether that campaign will be expanded beyond U.S. borders.