Will Crypto ICO Creators Get Any Do-Over Second Chance Mulligan With The SEC For Compliance?


In 2017, initial coin offerings (ICOs) were in their heyday. In fact, between July and November that year, they managed to raise a total of $3 billion amongst over 430 companies. ICOs were influenced by IPOs, which are initial public offerings, because of their success in traditional finance. However, there are many exceptions, like that an ICO does not have to have an operational company, and contributors during the funding rounds do not gain equity. Instead, they buy a future.

As the ICO industry boomed, the Securities and Exchange Commission (SEC) decided to crack down on the efforts in 2018, saying that there were companies that were in violation of two laws – Securities Act of 1933 and the Securities Exchange Act of 1934. The aforementioned laws said that certain actions cannot be taken with a security that hasn’t been registered with the SEC.

Considering how many companies had held ICOs at that time, the threat of losing their business and seeing legal action was overwhelming. There are still many companies that failed to meet these standards, but firms that want to comply may have options, according to Jason A. Nagi, Esq., an attorney in Polsinelli, PC’s FinTech and Regulation Practice.

Nagi believes that there are three cease and desist orders from the SEC that include certain measures that can fix non-compliant securities offerings. Those orders include Gladius Network LLC, Paragon Coin, and Airfox.

Collectively, they include the following measures, as written by Forbes:

  1. “File the tokens as a class of securities with the SEC.”
  2. “Provide a notice of claim form to each ICO purchaser of their rights to sue to recover the payment made for the security, with interest, or if the purchaser no longer owns the security, for damages.”
  3. “Provide the purchasers a specified time to submit a claim form.”
  4. “Return all payments to any claimant within three months from receipt of the claim form.”
  5. “Report to the SEC on a monthly basis as to the claims process.”
  6. “Provide a final report to the SEC within seven months.”
  7. “Retain all records.”
  8. “Pay a civil penalty.”
  9. “Comply with applicable [34 Act] reporting requirements going forward.”

Forbes points out that the Gladius Network was not forced to pay a penalty for their actions, due to the fact that they self-reported their activity and expressed interest in remediation. However, the other two companies included with the order had to pay fees.

Even though this is how the SEC carried out their work with other platforms, these steps are a mere suggestion. Realistically, until everything is done, there is no way to tell if this plan will ultimately work but understanding the process and the needs of the SEC can help with the uncertainty that the market faces with non-compliant tokes. It also ensures that the future of the industry can focus on offering blockchain-enables businesses, networks, and other firms that have a foundation involving compliant tokenized investments.

Nagi further encourages that issuers do all of their research before following the compliance procedures necessary for token issuance. Companies outside of the US have to take caution as well. Though many overseas companies allow for the fundraising of new companies with ICOs, issuers can still run into legal trouble if they sell tokens to investors within the United States, because they will end up subjected to the securities laws that they meant to avoid.

The exciting launch of ICOs in 2017 was fun, but it was two years ago. The SEC has made much more progress than when this fundraising tool originally came to life, and the only way to survive in the industry is to comply with their new regulations. Even if those regulations have been continually changing for two years.

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