The U.S. SEC or Securities and Exchange Commission has compelled two crypto startups to register their token sales as securities offerings. It is the first case that Commission has tracked an action like that, without some additional charges of fraud.

In one pair of orders which was published on Friday morning, the Securities and Exchange Commission has announced that it had settled the charges with CarrierEQ Inc. It is otherwise known as Airfox, and Paragon Coin Inc., wherein both of the startups would register their tokens/coins as securities, refund investors, pay penalties of $250,000, as well as file periodic statements with the regulator for 2019 at least.

Just like the settlement from the last week with the founder of the decentralized exchange EtherDelta, named Zachary Coburn, this appears to be a harbinger of things to come.

The orders from Friday will apply to 95% of the token sales

One partner at Castle Island Ventures, which is a venture capital fund that is focused on public blockchain startups, named Nic Carter, believes the regulator is now building up a body of case law against unregistered securities offerings, as well as bad actors.

Carter stated that it is challenging to say or predict what the SEC will do, but from what he understood from the strategy, they will go after the slam dunks, the low hanging fruit the cases where it is evident that there will be a profit made with the token.

The orders from this Friday appear to support that theory, according to the lawyer with D.C.-based law firm Anderson Kill, named Stephen Palley. Based on the style they are worded, Palley said that the orders are going to appear to apply to 95% of all the token sales in the last two years.

He added that the language is identical in several places. The footnotes are also similar. He says that it definitely looks like a template for him.

Later on Friday, the SEC has published a statement explaining its roadmap for regulating the Initial Coin Offerings or ICOs, crypto exchanges, secondary market trading platforms, as well as some other entities which facilitate token transactions.

Maybe most notably, the U.S. regulator has stated that there is a path to compliance with the federal securities law for some startups which issue tokens, even when issuers have conducted an illegally unregistered offering of digital asset securities already.

The use of the Howey test analysis

Palley has pointed out that the orders from Friday went through a pretty standard Howey analysis, referring to the three-pronged test utilized to determine whether an object offered for sale also qualifies as security.

The Howey test looks explicitly for an investment of money in a joint enterprise, which means that more than one party actually has funds tied up in the venture and an expectation of profit, said Casey Jennings, who is a senior associate with financial services law firm Seward Kissel LLP.

More importantly, Palley has noted that while some previous orders against ICO startups have included allegations of fraud or similar misdeeds, the announcement from Friday did not.

For some companies which are concerned about whether they may have violated securities law, Palley actually recommends checking in with a lawyer. Carter continued a step further, advising ICOs to move away from their tokens immediately.

He advised all ICOs to get ahead of the game and close up shop, delist the token, as well as get everyone their money back and pursue some regular business model which will not require a token.

The SEC also ramped up its efforts as it charges or settles charges with some different startups, according to Palley.

One partner at Seward & Kissel, named Anthony Tu-Sekine agreed with this, noting that the SEC ratcheted up the volume of its actions.

DAO Report outlining the views of SEC

The report of DAO, for instance, has outlined the views of SEC but it didn’t take any actions upon the organization, though this may have, in some part, been as a result of DAO already refunded investors.

Palley also noted that following the DAO Report was the Munchee order from December last year – at that time, Munchee agreed to refund all of the investors but was not required to pay any penalties or fees.

The statement of SEC this Friday also recommended that some projects reach out to legal counsel and the regulation itself through its FinHub project. Actually, the refunding investors may also be a problem for some ICO projects. Carter has noted that Paragon and Airfox both had the ability to provide full rescission to their investors, but not every ICO is going to have the ability to do that.

Even some startups that kept all of the tokens they raised at the time of their sales will have lost money regarding the U.S. dollar, as a result of the bear market, which means that they may have some difficulties paying investors.

From the perspective of an investor, Carter also noted that what really matters is the notion of an ICO which is pretty debunked as a fundraising method and they can go back to things which will make some sense for investors.

In the end, he concluded that he guesses it is going to take the market a while to realize the party is actually over, but the party is indeed over.

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