According to a press release, two crypto startups are being ordered to refund an ICO to investors, a first such decision for the Securities and Exchange Comission. This decision, as well as the increasing scrutiny that the SEC is paying towards ICOs, indicates a change in position for the enforcement body, which will continue to have a huge control over the crypto industry with little clarity on the rules.
Paragon Coin and CarrierEQ have already had fines levied against them by the SEC for failing to register their investment vehicle, but this decision represents the first time an ICO has been ordered to recompensate. The SEC of late has been visibly cracking down on ICOs and investigating crypto funds. One likely effect is that ICOs will become much less popular and desirable, a trend which seems to have already been underway with many notable crypto firms going instead for traditional IPOs.
Am I reading this correctly? Investors in Paragon can sue to receive "consideration paid for such security"--i.e. *fiat* value of investment?— Brendan Bernstein (@BMBernstein) November 17, 2018
If this is true & given ETH has collapsed 80%, ICOs that are sued will have to liquidate full treasury & declare bankruptcy #openFinance pic.twitter.com/Y0wxw8nnSt
As some have pointed out, for these two ICOs to completely compensate their investors, they will have to completely liquidate their assets to bankruptcy, which shows just how influental the prospects of an SEC willing to order crypto firms to refund ICOs is. Jake Chervinsky, a securities lawyer pointed out that in such class action lawsuits, fewer than 10% of victims actually receive compensation, indicating that these two crypto start-ups won’t necessarily implode in the SEC’s decision.
20/ Some of you are asking:— Jake Chervinsky (@jchervinsky) November 17, 2018
AirFox & Paragon do also have to give refunds to ICO investors, but only to those who submit timely claim forms & prove that they're entitled to payment. It'll be interesting see how many people do so. In class actions, claims rates are often < 10%.
Still, Chervinsky notes that this case represents a new ‘phase’ for the SEC, which is bound to have a significant effect on the crypto landscape from here on out. Chervinsky highlights the decision against Paragon and CarrierEQ in tandem with SEC statements over the last few days, all in the context of a significant lack of Congressional clarity on regulation, which is pushing the SEC into a ‘guidance by enforcement’
8/ This is a classic SEC strategy known as "guidance by enforcement."— Jake Chervinsky (@jchervinsky) November 17, 2018
It can be deeply frustrating for an industry in need of a clear set of rules rather than a patchwork of orders. But regulators like it: it leaves them free to exercise their discretion.https://t.co/caL7RiSOQ4
Essentially, because the SEC does not make the law, and isn’t really in a position to openly litigate unclear laws in court cases, they instead continue to issue vague statements while strategically prosecuting various parts of the industry in order to shape the legal boundaries without committing to specific rules, which they, in fact, aren’t in much position to commit too, given their status as an enforcement body and not a legislative one.
Chervinsky notes that in the absence or regulatory clarity from the federal government, the SEC’s role will now be ‘phase two’ of enforcement, which he characterizes as ‘a slow, painful grind where the SEC cleans up the crypto space one settlement at a time.’