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The SEC released a press release today detailing the settlement of civil penalties imposed on 2 completed ICOs — Airfox and Paragon –, signaling a transition in the SEC’s emphasis on regulating completed ICOs.

As part of the settlement, both Airfox and Paragon have agreed to pay $250k in fines, register their tokens as securities, file periodic reports with the SEC, and return investors’ funds.

The SEC’s Position and Strategy is Becoming More Clear

After much speculation about how the SEC would approach ICOs — particularly already completed token sales — their strategy is beginning to take shape. The settlement follows the first non-fraud ICO registration case by the SEC, Munchee Inc.

The settlement case for Airfox and Paragon is important because it establishes a precedent for the SEC to go after already completed ICOs that they deem as securities and in violation of securities law by not registering as securities. According to a statement by Stephanie Avakian, the Co-Director of the SEC’s enforcement division:

“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.”

The SEC’s strategy is making it clear that they are going after more apparent cases of token sales resembling securities. By establishing an accumulated case law going after smaller token sales, they are building the framework to potentially tackle larger token sales. For instance, the SEC just opened a probe into the cryptocurrency loaning platform Salt over its $50 million token sale. For context, Airfox raised roughly $15 million, and Paragon raised approximately $12 million.

With many ICOs having failed and investor funds not returned, it will be interesting to see how the SEC approaches these token sales. Especially when taking into account that the treasuries of many ICOs are likely not sufficient to cover investor returns, the template laid down by the SEC could prove exceptionally problematic for many ICOs that clearly resembled securities.

Comprehensive retroactive regulation on completed token sales seems unrealistic considering the sheer amount of token sales throughout 2017 and 2018. However, the SEC may end up pursuing this template for sales they deem as securities for several years, targeting more obvious fraud cases and prominent sales that did not register with the commission. The long-term consequences of such a sustained pursuit could eventually see the demise of ICOs entirely within U.S. jurisdiction over the coming years.

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