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Aaron Wright @awrigh01
, 22 tweets, 4 min read Read on Twitter
SEC just entered into settlements with two projects (Airfox and Paragon) for failing to register tokens as securities. Lots of additional detail on how the SEC is viewing the sale of tokens to “investors.” Thread below:…
Paragon was an online entity that was purportedly established to implement blockchain technology in the cannabis industry.
They engaged in what can be viewed as a standard token sale for 2017 — selling ERC 20 tokens to investors (at a discount) to fund the development of the service.
The SEC--in their order instituting a cease and desist--focused several times on the fact that the funding was being used to develop the platform and ancillary ecosystem.…
As a result, the SEC determined that a purchaser "would have had a reasonable expectation of
obtaining a future profit based upon Paragon’s efforts."
Paragon offered a pre-sale of its tokens to investors and offered those investors discounts. They sold tokens to at least 7 investors through private agreements (something, presumably, like a SAFT).
The tokens were to be used to enable folks to buy goods or services in the future (so had some sort of utility) component, but "no one was able to buy any good or service with [Paragon’s token] before or during the offering other than pre-ordering Paragon merchandise."
Paragon repeatedly stated in marketing materials that the value of the token would increase, if demand for the service increased through a "built-in 'deflation algorithm' which was designed to decrease supply of PRG tokens and in turn, increase the value of PRG tokens."
Paragon informed purchasers that they would burn tokens to immediately increase the value of the sold tokens and maintain a reserve to maintain price stability.
Through various forum, they promised folks profits and helped facilitate that by promising that the token would be listed on exchanges.
The key concern from the SEC’s perspective appears to these promises and the promise to develop an ecosystem around this token.
Airfox was an existing company that provided prepaid mobile telecommunications operators to
earn free or discounted airtime or data by interacting with advertisements on their smartphones.
Airfox added a token—the “AirToken”—to add new functionality to their service, "including the ability to transfer AirTokens between users, peer-to-peer lending, credit scoring, and, eventually, using AirTokens to buy and sell goods and services other than mobile data."
In connection with the sale (and similar to Paragon), AirFox stated that AirTokens would increase in value as a result of AirFox’s efforts, and that AirFox would undertake efforts to provide investors with liquidity by making AirTokens tradeable on secondary markets
The SEC found the AirToken to be a security despite the fact that “[t]he terms of AirFox’s [ICO] purported to require purchasers to agree that they were buying AirTokens for their utility as a medium of exchange for mobile airtime, and not as an investment or a security."
Members of the company admitted that that ICO was "really just for . . . for investment purposes so people know . . . how it’s going to work” and “[did not] have any real users."
AirFox knew that investors wanted the ability to freely trade AirTokens in the secondary market, and "made clear to prospective investors that it planned to enter into agreements with token exchanges to ensure that the AirToken would be traded on the secondary market."
As a result, the SEC determined that purchasers reasonably viewed the AirToken as an opportunity to profit if "AirFox was successful in its entrepreneurial and managerial efforts to develop its business."
Use of the token was not required: “[P]urchasers reasonably believed they could pursue such profits by holding or trading AirTokens, whether or not they ever used the AirFox App or otherwise participated in the AirToken ecosystem."
The SEC also flagged AirTalk’s “bounty” campaign” and the fact that "AirFox primarily aimed its promotional efforts for the initial coin offering at digital token investors rather than anticipated users of AirTokens."
All in all, the SEC found the AirToken concerning, for many reasons, but it appears the largest concerns were that:
- AirTalk used proceeds to build out and support their token ecosystem.
- Took steps--and highlighted--that they would ensure secondary trading.
- Sold tokens to folks that were not ultimately users.
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