I warned MLM companies and consumers alike of the dangers surrounding cryptocurrencies all the way back in 2015. This did little to deter most people in the MLM space from joining the frenzy in the coming years. From offers of mining rigs to the sale of all different “new” and “original” digital coins or “tokens,” MLMs have repeatedly taken advantage of the cryptocurrency craze and confusion at the expense of widespread consumer harm. Through it all and with relatively few exceptions, United States regulators took a surprisingly (and at times frustratingly) reserved approach to the space. However, the SEC’s recent actions signal that the days of the Wild, Wild West are drawing to a close.
THE SEC’S TAKE ON TOKEN SALES & EXCHANGES
In its Public Statement, the SEC spoke of two recent enforcement actions against companies engaged in token sales. Both Paragon Coin, Inc (Paragon) and CarrierEQ, Inc (dba Airfox) sold tokens that the SEC deemed unregistered securities. The SEC hit Paragron and Airfox with $250,000 fines.
The SEC’s enforcement actions against Paragon and Airfox are important for a couple of different reasons. For one, they represent the SEC’s increased interest in regulating the cryptocurrency space. The actions also mark the first time the SEC has imposed civil penalties on companies who have raised money by way of unregistered token sales. But most important of all, the cases against Paragon and Airfox provide a clear pathway by which past companies engaged in token sales can remedy previous violations of the law.
It’s important to add that the SEC’s guidance also covered the topic related to “Broker-Dealers.” Basically, when an entity facilitates the trading of digital asset securities, the entity needs to be registered with the SEC. And when someone is “engaged in the business of effecting transactions in securities for the account of others…,” they need to be registered as Brokers. This would blow a hole in the concept of having “trading bots” or “slave accounts” that mirror the trades of other accounts. In both instances, whether a human or an algorithm is facilitating a trade, a Broker license is required.
As Chairman of the SEC has clearly stated on numerous occasions: What is in the mind of the consumer at the time of the transaction? If there’s an expectation of receiving some sort of a passive return on an investment (or a “purchase”), the SEC has an interest in that sort of activity. Period.
MLM companies who have sold tokens or helped facilitate the sale of tokens in the past are now at risk. To steer clear of a fight that almost no one wins, past companies are wise to comply with the following three remedial measures prescribed by the SEC: register, refund, and report.
(1) Register: Companies need to register tokens in accordance with the Securities and Exchange Act of 1934 (Exchange Act). It’s not difficult. It could be as simple as filling out a simple application online.
(2) Refund: The SEC also instructs token companies to offer consumer refunds. Formally described as a “right of rescission,” companies should offer purchasers the right to ask for their money back. This refund request can occur in one of two ways. Either a consumer can return the token to the company and receive a refund, or a consumer can request damages for money lost if no longer in possession of the token.
(3) Report: After registration, companies must submit to ongoing reporting obligations per the Exchange Act.
WHAT CAN BE DONE
At Thompson Burton, we’re not going to advise clients on how to sell unregistered securities. There’s no way to do it without going through the SEC, which invariably leads to the end of the network marketing concept (it’s nearly impossible to allocate commissions on the sale of securities). But to the extent a company has made mistakes, perhaps received bad legal counsel to the contrary, we can help these companies unwind in a satisfactory manner with the SEC.
For individual consumers, they should do whatever possible to receive, at a minimum, a full refund of funds invested. In most states, the consumer protection statutes allow victims of consumer fraud to receive THREE times damages. If you purchased mining rigs or if you invested in some kind of alt-coin opportunity (trading bots or any sort of token project hooked to an MLM pay plan), there’s a chance you have an opportunity to recover funds. Depending on your state, our firm might be able to help you recover your funds. If our firm is unable to help, we might be in a position to make a referral to an attorney that can.