On March 15, 2019, CarrierEQ, Inc., a/k/a AirFox, filed a Form 10 with the SEC in the next step on its Path to Compliance. AirFox settled an administrative proceeding with the SEC in November 2018 related to its 2017 initial coin offering. The settlement requires AirFox to fulfill specified conditions. The company already has met certain of those condition. Specifically, it issued a press release announcing the settlement, paid a fine, and publicized a draft Claim Form (which will go live within 60 days of the filing of the Form 10).
The Form 10 registers the AirToken under Section 12 of the Securities Exchange Act of 1934. Purchasers of AirTokens during the ICO (who still have their AirTokens or sold at a loss) will have 90 days to submit a claim to have the company repurchase the tokens or compensate the purchaser for its loss. Once the 90-day period is over and all claims are resolved, the Company will have fulfilled the SEC’s requirements to come into compliance with the securities laws, subject to certain ongoing reporting obligations. AirTokens will then be registered security tokens.
A quick review of the Form 10 confirms that it contains more robust disclosures about the company than what is normally found in a whitepaper connected to an ICO. Whitepapers have been useful to outline the business model of a crypto-company, highlight executive experience, and explain technical aspects of projects. But they rarely go into detail on the many risk factors involved in buying the token offered in an ICO. This Form 10, by contrast, details the many risk factors involved in investing in an early-stage company. This should be helpful to AirToken purchasers and is likely what the SEC desires for token issuers going forward.
A few other notes on the filing:
- The rescission offer is open to parties who obtained AirTokens from the Company on or before October 5, 2017 (that is, during the AirFox ICO, which ran for several weeks from pre-sale to public sale). Secondary market purchasers do not appear to have any rights of rescission.
- The Form 10 notes that there is no public trading market for AirTokens. Will completing the Path to Compliance allow AirTokens to be traded on a secondary securities market, such as an ATS, and create liquidity? The Form 10 notes that AirTokens will be restricted securities, subject to transfer only pursuant to an exemption under the Securities Act, until AirFox files a Registration Statement, which it intends to do within 90 days.
- The filing notes that the “SEC staff takes the position that a person’s federal right of rescission may survive the rescission offer.” These rescission rights, which presumably expired before the settlement, appeared to be resurrected by the staff in connection with the settlement. If an individual does not make a claim on AirToken when the rescission offering is live, could they successfully sue for rescission later?
- The Company took significant impairment charges on its digital assets, recognizing a dimunition in value of its stored Bitcoin and Ether. These charges are unsurprising given the steep decline in cryptocurrency prices in 2018.
We look forward to continue tracking the progress of companies engaging with the SEC in an effort to come into compliance while creating sustainable businesses.
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Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking. This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.