Similar to other emerging technologies, blockchain-based enterprises are subject to murky regulatory waters. Alongside other global regulatory agencies, the Securities and Exchange Commission issued various civil penalties against blockchain enterprises over the past two years.
The 2017 DAO Report
The 2017 DAO report was issued in response to Slock.it, an internet company incorporated in Germany. Their Ethereum-based token sale raised 12 million Ether between April and May 2016.
According to the SEC, a DAO is a, “Decentralized Autonomous Organization” which is executed on a blockchain. The 2017 DAO report is the first formal judgement by the SEC on initial coin offerings and their relationship to the Securities Act of 1933 and the Securities Exchange Act of 1934. The DAO report was meant to advise future use of blockchain-enabled means of fundraising.
Stock.it were not fined and faced no “enforcement action” from the SEC after the DAO report was issued.
The SEC’s First Civil Penalties Post-DAO Report
Paragon Coin has appeared in BBHQ before, but their case stands as a historical example of the SEC’s first civil penalties on a blockchain enterprise for initial coin offerings. Paragon Coin, a blockchain-based cannabis company, raised $12 million from the initial coin offering. Paragon Coin’s, “software as a product” made $54 in gross transactions after one year.
In the same SEC report, CarrierEQ Inc. (Airfox) were also slapped with civil penalties. The Boston-based company raised $15 million from the offering to, “develop an ecosystem.” Both companies were fined $250,000.
Floyd Mayweather, Jr. and DJ Khaled Also Make History
Floyd Mayweather, Jr. and DJ Khaled were the SEC’s first civil cases for touting violations involving ICO’s. Both celebrities were embroiled in a lawsuit over promoting an allegedly fraudulent initial coin offering.
The boxer and musician failed to tell their fanbase that they had received promotional payments from the ICO companies they hyped on social media. Floyd Mayweather, Jr. received three separate payments, totalling $300,000 from different ICO founders. He was charged over $600,000 in civil penalties for posts on his Twitter account.
DJ Khaled commanded less than Mayweather, Jr. and received a $50,000 payment to promote initial coin offerings. He was charged over $150,000 in civil penalties.
After paying the penalties, the two celebrities were declared exempt from the lawsuit involving an allegedly fraudulent initial coin offering.
It took two days for Munchee, Inc. to receive a cease-and-desist from the SEC after the company released an initial coin offering on the internet. The California-based software company distributed the offering through posts on Facebook, Twitter, BitcoinTalk, and the Munchee website. They had not filed the proper paperwork under sections 5(a) and 5(c) the Securities Act.
Munchee thought they had analyzed the 2017 DAO report correctly. According to the Munchee White Paper, the sale of their Munchee token (MUN) did not, “…pose a significant risk of implicating federal securities laws.”
Munchee, Inc. were not slapped with any civil penalties as they promptly shut down the initial coin offering after contact from the Commission.
For the latest examples of blockchain enterprises targeted by the SEC, click here.