According to Kobre & Kim government enforcement defense and securities litigation attorney Jake Chervinsky, the second phase of the US Securities and Exchange Commission (SEC)’s enforcement on crypto is a painful and slow grind for the sector.
Earlier this week, the US SEC cracked down on Paragon and AirFox, two initial coin offering (ICO) projects that raised $12 million and $15 million respectively in two different areas of the crypto market.
The SEC is said to have targeted EtherDelta, Paragon, and AirFox as guidance settlements and to establish a precedent across the cryptocurrency sector, and is expected to clean up every major area of the ICO market in the coming months.
At the Investment Adviser Association conference in Washington, D.C., Stephanie Avakian, co-director of the SEC’s Enforcement Division, hinted that dozens of ICOs are being investigated by the SEC as of current.
Slow Grind Ahead
All three projects that reached settlements with the SEC over the past two weeks have paid relatively small penalties in the range of $250,000 to $300,000. Both Paragon and AirFox were ordered to pay $250,000 as a fine for issuing an unregistered security, despite the clear discrepancy between the amount of money raised by the two projects.
The SEC decided to impose an identical fine on both projects because the intent of the commission was to target major projects and establish a precedent for the industry. But, crucially, the SEC refrained from offering a clear guideline for tokens to be considered non-securities under existing regulations.
With every newly emerging industry, Chervinsky explained that the SEC tends to employ a strategy called guidance by enforcement and does not provide a clear set of rules to avoid being in legal conflict with projects that could result in a state court or a federal court solidifying the regulatory nature of the project or the market.
“This is a classic SEC strategy known as ‘guidance by enforcement.’ 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. The SEC rarely wants to test uncertain legal theories in court. If they were to lose on a big issue–like whether tokens are securities–it could disrupt their enforcement strategy for the entire industry. The best way to avoid that result? Leave the rules vague and ambiguous.”
In its official announcement, the SEC emphasized that it encourages token issuers to cooperate with the SEC, doubling down on its neutral stance towards blockchain technology and willingness to allow the ICO market to continue operating as long as token issuers comply with local laws.