The Securities and Exchange Commission announced today that it has reached settlements with two companies that sold digital tokens in initial coin offerings or ICO’s. Cannabis-related company Paragon Coin was one of the businesses investigated by the SEC.
The SEC said that Paragon raised approximately $12 million worth of digital assets to develop and implement its business plan to add blockchain technology to the cannabis industry and work toward legalization of cannabis. The SEC statement wrote that Paragon did not register its ICO pursuant to the federal securities laws, nor did it qualify for an exemption to the registration requirements.
“We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “These cases tell those who are considering taking similar actions that we continue to be on the lookout for violations of the federal securities laws with respect to digital assets.”
Paragon faces a $250,000 penalty and must compensate the investors. They must register the tokens as securities and file periodic reports with 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.
Paragon’s CEO Jessica Ver Steeg would not comment on the settlement. However, it was well known that the money raised from the ICO was used to acquire a building in order to create a co-working space for cannabis startups in Los Angeles, called Paragon Space.
Paragon faced a lawsuit not long after the ICO. The lawsuit stated that approximately between August 15, 2017, through October 16, 2017, the defendants raised at least $70 million in digital cryptocurrencies by offering and selling unregistered securities in direct violation of the Securities Act. It also stated that on November 2, 2017, Paragon ICO investors received an email updating them that during the Paragon ICO “crowd sale” they had collected 533 BTC and 8,092 ETH— worth approximately $7.3 million and $10.2 million, respectively, as of January 12, 2018. Unfortunately, these amounts did not include any of the cryptocurrencies they collected during the Paragon ICO “presale.”
At the time Ver Steeg said, “Paragon is dedicated to staying compliant with all applicable laws, and endeavored to do so throughout the entire ICO process. As U.S. Securities and Exchange Commission Chairman Jay Clayton recently stated, “there are cryptocurrencies that do not appear to be securities,” and whether an initial coin offering implicates the securities laws “depends on the facts.” We are confident that the ParagonCoin token is not a security and can prove so in a court of law.” Apparently, the SEC disagreed.
In order to reimburse the investors, it will need to somehow retrieve the tokens from the market, make the investors whole and then reregister the tokens as securities. A daunting task to be sure.
Paragon’s case follows the SEC’s first non-fraud ICO registration case, Munchee, Inc. The Commission did not impose a penalty or include undertakings from Munchee, which stopped its offering before delivering any tokens and promptly returned proceeds to investors.
Paragon is moving forward with its ParagonChain, based on smart-contract interaction with the Ethereum blockchain. The company said it would begin to roll out user interfaces for different aspects of the supply chain, for both cannabis businesses and consumers. Paragon said it has entered into agreements with several major cannabis companies who are expected to start using ParagonChain for their day-to-day operations as early as December, including Dreamfields, Fundanna, Flux, Oakland Distribution, Pearl Pharma, Mammoth Labs, and THC Design (TBD).