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Dodd-Frank

SEC Tells How to Fix the Faulty Initial Coin Offering

by   |   November 17, 2018

The SEC simultaneously announced a pair of settled enforcement actions related to illegally offered ICOs with extensive remedial provisions to fix the faulty offerings. You can find the enforcement actions here (Airfax) and here (Paragon).

The first step is to issue a press release stating you are going to offer to give everyone their money back.

The second step is to register the coins on Form 10 under the Exchange Act. A daunting task maybe, given little is known how to register coins. You will probably need audited financial statements and all that stuff. Then there are those pesky 34 Act reporting obligations which will follow such as 10-Ks, 10-Qs and 8-Ks. I wonder how Section 16 applies and who has to report.

The third step is to offer to give everyone their money back. According to the SEC you must distribute by electronic means reasonably designed to notify each potential claimant, a notice and a claim form, informing all persons and entities that purchased tokens of their potential claims under Section 12(a) of the Securities Act, including the right to sue “to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if [the purchaser] no longer owns the security” and informing purchasers that they may submit a written claim on the claim form directly to the token issuer.

When the settlements were announced the press release noted these settlements provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws.

There probably won’t be all kinds of token issuers beating the door down to follow this model. Nonetheless, it needs to be considered by those with viable business models going forward that crossed the line when offering tokens. The unappealing alternative is to wait out the statute of limitations with hamstrung viability from contingent liabilities related to the illegal offering of tokens.