Tag: public offering

Airfox SEC Cryptocurrency Alt-Coin Settlement Is Everything Coin Issuers Hoped to Avoid – Securities Act Analysis Applies to Token Issuances

Airfox settles with SEC and treats tokens like the securities they are

CarrierEQ, Inc. (Airfox) did an initial coin offering in October 2017. They raised about $15 million to finance their digital token-denominated ecosystem for playing with ads.

Not bad, right? After all, lots of people were saying how ICOs were a cheap, non-dilutive way to raise money because SEC rules didn’t apply.

The SEC didn’t agree, as it warned in the DAO Report.

For its trouble, Airfox will pay a $250,000 penalty, which is not too bad.

However, they must also:

  • Register the tokens under the Exchange Act; and
  • File periodic reports with the SEC.

So far, expensive but still less than $15 million.

Airfox says they’re pleased with the result:

“We are pleased with these developments. We believe by reaching this resolution with the SEC and MSD, we are removing uncertainty and positioning Airfox to grow our blockchain platform within a regulatory framework,” said Victor Santos, CEO and co-founder, Airfox.

I doubt it. They must also offer rescission rights to everyone who bought their tokens from the Company.

Here we go.

Airtokens were issued at about $0.014 per token (they issued 1.06 billion tokens for $15 million).  They are currently worth about 1/10 of that. If you invested, would you get your money back if you had the chance?

For their sake, I hope Airfox had another source of funding.

Expect more of this from the SEC:

“By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

Other notes:

  • The Massachusetts Securities Division was also involved, and it has been active in trying to police these activities.
  • Paragon Coin also settled with the SEC.  Paragon wants to integrate blockchain and the cannabis industry.
The Airtoken ecosystem.

SEC Issues Stop Order For “IPO”

Here’s something you don’t see everyday.

Typically, when going through the SEC registration process, you file a registration statement, the SEC comments, you respond and file an amendment, lather, rinse and repeat until all comments are resolved and the issuer is ready to go effective.

However, the SEC can issue a stop order to prevent the use of a registration statement if the registration statement is somehow deficient. This brings us to Counseling International, Inc.

Counseling International originally filed a Form S-1 in August 2012. It filed various amendments through June 2013. There does not seem to be an order declaring it effective, and the comment letters and responses are not yet posted on EDGAR (which occurs some time after effectiveness).

It seems to be a stretch to call this an IPO as the Form S-1 covers the resale of the shares by selling shareholders, there is no underwriter, there is no securities exchange listing and the company’s assets consist of about $21,000.  However, it is the initial filing by a non-reporting company.

On August 22, 2013, the SEC issued a stop order after it determined that the registration statement contained false and misleading information, identified by the SEC as:

  • failure to disclose the identity of control persons and promoters; and
  • false description of the circumstances of the departure of the former chief executive officer.

The prospectus provides the following language, which we guess missed some crucial details:

“The Company was founded by Layla Stone, who served as the director and chief executive officer of the Company until she sold all of her equity interest in the Company to Maribel Flores on October 19, 2012, and resigned from such positions on the same date. On October 19, 2012, Ms. Flores became the sole director and officer of the Company.”

Until the comment and response letters are posted, it will be difficult to know exactly what went on, but it must have been a serious situation for the SEC to take this drastic measure. How drastic, you ask?

First, the registration statement had a typical delaying amendment, so it would not have gone effective without SEC action in any case.

Second, Counseling International agreed to penalties, which include ineligibility to conduct a Rule 506 offering for five years or occupy any position with, ownership of or relationship to the issuer enumerated in Rule 506(d)(1). [Ed. Note: This second clause seems to apply to an individual, but the “Respondent” described in the stop order seems to be limited to Counseling International. Please let me know in the comments if I just missed something, but I had trouble making sense of this. It may be a boilerplate clause, but it is difficult to tell from the stop order document alone. The press release only refers to the ineligibility for the use of Rule 506 as a penalty.]

The SEC had the following to say, which highlights how they viewed the situation:

“Rarely do we have the opportunity to prevent investor harm before shares are even sold, but this stop order ensures that Counseling International’s stock cannot be sold in the public markets under this misleading registration statement.”

Links:
Most recent amendment to Form S-1
Stop Order
SEC Press Release

The High Cost of Avoiding Higher Costs

I have a very long ‘to do’ list for setting up the new solo practice.  There is a ton of stuff that my old firm used to handle for me.  I never paid any mind to any of it.  And now I have to arrange for lots of stuff, including professional liability insurance.

Where to start?  I was going to go through the Texas bar program for insurance, but I read that they won’t write insurance if your securities practice is too large.  My may become too large, but its difficult to know since I won’t have any clients when I start.  I got a recommendation for a broker from a friend who had a solo practice a few years ago.

I await the estimates for the policy early next week, but the securities coverage is expensive.  The securities rider to the application was lengthy and was not particularly well suited to a new practice that is disconnected to the old practice.  For example, as a solo practitioner, it is unlikely that I’ll be representing underwriters in initial public offerings, but that had been a major part of my practice over the last few years.  And yet, the rider was focused on extrapolating the last year or so of my practice over the next year for coverage.  We’ll see how it turns out.