SEC Staff Releases Statement on Digital Asset Securities Issuance and Trading and Provides Guidance on Path Forward for Resolving Unregistered Initial Coin Offerings

Dechert LLP

The U.S. Securities and Exchange Commission announced two settled enforcement actions on November 16, 2018, imposing registration requirements and civil penalties against issuers of initial coin offerings (ICOs) for failing to register their respective offerings under Section 5 of the Securities Act of 1933.1 These settlements – involving Paragon and AirFox – are the first enforcement actions imposing civil penalties against issuers of digital asset tokens in an ICO for violating the registration requirements of the federal securities laws, in the absence of allegations of fraud. 

Later the same day, the SEC’s Divisions of Corporation Finance, Investment Management and Trading and Markets issued a joint statement (Joint Statement) highlighting the SEC staff’s (Staff) enforcement actions and reiterating certain key points with respect to digital asset securities.

AirFox and Paragon Settlements – A Roadmap to Compliance for Unregistered ICOs

Previously, in December 2017, the SEC ordered token issuer Munchee Inc. to discontinue its token offering and refund investors without imposing civil penalties.2 The current settlements, in contrast, impose civil penalties on the issuers and require them to undertake remediation efforts that include registration of the tokens as securities under the Securities Exchange Act of 1934. The SEC determined that the ICOs and token presales conducted by AirFox and Paragon constituted the offer and sale of securities under the Securities Act. In the orders, the SEC reiterated (as first announced in the DAO Report)3 that the correct test for the determination of whether a digital asset is a security is the Howey Test.4 According to the SEC, token sales in both AirFox and Paragon were “investment contracts” that are required to be offered in accordance with SEC registration requirements or an applicable exemption.

The settlements require AirFox and Paragon to file Form 10 with the SEC within 90 days of the respective orders to register their tokens as a class of securities under the Exchange Act. Each issuer is also required to file periodic reports under the Exchange Act for at least one year. These reports are intended to furnish holders of the digital asset securities with sufficient information to evaluate their investment, and provide disclosure of the type required by the Exchange Act. Given that no digital asset security has yet been registered under the Exchange Act, it is not clear from the orders how the issuers will approach their disclosure obligations and the scope of information that will be provided.

In addition to the registration requirements, AirFox and Paragon will be required to provide an SEC approved “claim form” to all token purchasers who had purchased tokens in the presale or ICO. Such purchasers will be entitled to receive the consideration paid plus interest (less the amount of any income received thereon) in exchange for tender of their tokens. Notably, the SEC did not specify whether consideration would be returned in the form it was originally received (e.g., bitcoin, ether or other digital assets used to purchase tokens in the presale or ICO) or whether it would be returned in U.S. dollars at the U.S. dollar equivalent rate at the time of investment. While AirFox’s claim form indicates that claims will be paid in U.S. dollars based on the value at time of purchase, it is not clear whether this was a requirement of the settlement or will be required in future settlements. Each company was also fined $250,000.

The orders leave significant questions unaddressed. For example, the orders do not indicate how or whether the SEC will adapt its disclosure and reporting regime to accommodate the registration of a digital asset security or a digital asset security issuer. Nor do the orders indicate whether token holders who decline the repurchase offer will hold tokens that are immediately freely tradable under the federal securities laws.

The Joint Statement – A Summary of Enforcement Actions and Reiteration of Division Positions

The Joint Statement highlights recent enforcement actions that fall into the following categories: (i) offers and sales of unregistered digital asset securities; (ii) investment vehicles and investment advisers that invest in digital asset securities; and (iii) trading of digital asset securities.

Offers and Sales of Unregistered Digital Asset Securities

The Staff noted that enforcement actions involving the offer and sale of digital asset securities have focused primarily on whether the assets were securities and, if so, what federal securities laws applied. Discussing the AirFox and Paragon orders, the Staff indicated that the settlements show a “path to compliance” for companies that have already conducted an unregistered offering of digital asset securities. In the settlements, in addition to paying penalties, the companies agreed to register their respective tokens as securities with the SEC and compensate those investors who purchased unregistered tokens and elect to make a claim for rescission.

Investment Vehicles and Investment Advisers Investing in Digital Asset Securities

The Staff noted that the Investment Company Act of 1940 requires the registration of, and provides a regulatory framework for, pooled investment vehicles that invest in digital asset securities and their service providers. By way of example, the Staff discussed the application of the 1940 Act in a recent enforcement action against the manager of what the SEC alleged was an unregistered investment company that invested in digital asset securities.5 In addition, the SEC further alleged that the manager itself was operating as an unregistered investment adviser, which gave rise to alleged violations of the Investment Advisers Act of 1940. The Staff also indicated in a footnote that the federal securities laws apply to the offer and sale of interests in pooled investment vehicles as well, regardless of whether the interests in such investment vehicles utilize new technologies, including blockchain.

Trading of Digital Asset Securities

The Staff devoted a substantial portion of the statement to discussing the application of the federal securities laws governing securities exchanges and broker-dealers to companies that operate platforms for trading digital assets or engage in other activities that facilitate the trading of such assets.

Registration as a National Securities Exchange

The Staff explained that a platform that allows users to trade digital asset securities and otherwise meets the definition of an exchange under the Exchange Act must either register with the SEC as a national securities exchange or qualify for a registration exemption, such as by registering instead as an alternative trading system (ATS) under Regulation ATS. From this perspective, the Staff addressed decentralized exchanges by reference to a recent enforcement order against the founder of EtherDelta for operating an unregistered securities exchange.6

Turning to the question of when a digital asset trading platform may be a securities exchange, the Staff further explained that the Exchange Act and the rules promulgated thereunder apply a functional test to determine whether a platform is a securities exchange, noting that the activity between buyers and sellers on the platform, and not the technology being used, is the determinative factor.

As background, Rule 3b-16 under the Exchange Act provides a two-part test for determining when a platform provides “a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange” for purposes of meeting the definition of an “exchange” under the Exchange Act.7 The first part of the test is whether the platform “[b]rings together the orders for securities of multiple buyers and sellers.” The second part of the test is whether the platform “[u]ses established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of a trade.”

With respect to the first prong of Rule 3b-16, the Staff stated that a platform would be considered as “bringing together orders of buyer[s] and sellers” if the platform displays to users a “trading interest” of digital asset securities entered on the platform or receives orders for digital asset securities “centrally for future processing and execution.” With respect to the second prong of Rule 3b-16, the Staff noted that a platform that “provides a trading facility or sets of rules” is considered to be using “established non-discretionary methods.” The Staff provided the following examples of when a platform employing blockchain or other new technologies could potentially be deemed to be establishing non-discretionary methods:

  • “An entity that provides an algorithm, run on a computer program or on a smart contract using blockchain technology, as a means to bring together or execute orders could be providing a trading facility.”
  • “An entity that sets execution priorities, standardizes material terms for digital asset securities traded on the system, or requires orders to conform with predetermined protocols of a smart contract, could be setting rules.”

The Staff also explained that an entity that “arranges for other entities, either directly or indirectly, to provide the various functions of a trading system that together meet the definition of an exchange” may be deemed to be a securities exchange.

Registration as a Broker-Dealer, Transfer Agent or Clearing Agency

The Staff stated that a company that facilitates the initial offering or trading in secondary markets of digital asset securities could be deemed a “broker” or “dealer” under the Exchange Act, and may therefore need to register with the SEC as a broker-dealer and become a member of the Financial Industry Regulatory Authority (FINRA). The Staff pointed to a recent enforcement action in which an alleged unregistered broker-dealer operated a platform on which users could purchase digital asset securities, including assets issued in ICOs.8 Through the platform, the company accepted users’ orders for digital asset securities and disbursed the payment of funds to issuers, and received as compensation a percentage of the ICO proceeds and a guaranteed minimum commission.

Although the SEC to date has not yet brought an enforcement action against a company for operating as an unregistered transfer agent or clearing agency, the Staff also indicated in a footnote to the Joint Statement that companies should consider the possible application of transfer agent and clearing agency registration requirements.


The Joint Statement appears to be an attempt by the Staff to distill practical guidance from a growing body of SEC enforcement actions, to help companies that provide services in the area of digital assets to comply with the federal securities laws, with a particular emphasis that the existing legal framework continues to apply regardless of technological innovation. The Joint Statement and the orders demonstrate an effort by the SEC to balance a commitment to investor protection with the promotion of innovation in financial markets. Notably, the SEC has indicated that it will allow the tokens issued in unregistered, illegal offerings to remain outstanding, even though the issuer will need to conduct a rescission offer. Companies that engage in activities involving digital assets should review their business models in light of the guidance provided in the Joint Statement to determine whether registration with the SEC of the securities or the entity is required.


1) Two ICO Issuers Settle SEC Registration Charges, Agree to Register Tokens as Securities, (Nov. 16, 2018). The settlement orders are: CarrierEQ, Inc., Securities Act Release 10575 (Nov. 16, 2018) (AirFox) and Paragon Coin, Inc., Securities Act Release 10574 (Nov. 16, 2018) (Paragon).

2) In the Matter of Munchee Inc., Securities Act Release No. 10445 (Dec. 11, 2017).

3) Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Exchange Act Release 81207 (July 25, 2017) (DAO Report). For further discussion regarding the DAO Report, please refer to Dechert OnPoint: SEC Focuses on Initial Coin Offerings: Tokens May Be Securities Under Federal Securities Laws.

4) For a discussion of the Howey test and its key elements, please see Dechert OnPointSEC Focuses on Initial Coin Offerings: Tokens May Be Securities Under Federal Securities Laws.

5) Crypto Asset Management, LP and Timothy Enneking, Securities Act Release 10544 (Sept. 11, 2018).

6) Zachary Coburn, Rel. No. 34-84553 (Nov. 8, 2018) (settled order).

7) Section 3(a)(1) of the Exchange Act provides: The term ‘‘exchange’’ means any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange.

8) Tokenlot LLC, Lenny Kugel, and Eli L. Lewitt, Securities Act Release 10543 (Sept. 11, 2018).


Written by:

Dechert LLP

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
  • New Relic - For more information on New Relic cookies, please visit
  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.