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    Posted by Shane McQuillan 19 Sep 2019
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    The SEC has charged ICOBox with Securities Law Violations to the Cheer of Incumbent Players

    Yes folks, once again the reach of the incumbent driven SEC has plucked out a service provider from within the Blockchain ecosystem as ICOBox is charged with violations of securities law. As the headline suggests, this is to the cheers of the blinkered incumbent fan base who seem to have an ability to only focus on crypto and each and every accusation which is laid against the crypto ecosystem.

    Link to the actual complaint is at the bottom of the page.

    Yes, it is “Alleged” that ICO Box has committed a number of serious infractions on outdated and one sided regulations, regulations which are there to protect incumbent powers more so, than to protect the average Joe. We will get into the allegations in a moment, and of course, we will not jump to conclusions, as that is for a court of law, one which has proper jurisdiction over the case.

    What riles me as an actor within the crypto ecosystem is how any person or persons can take such one sided viewpoints without looking to their own sector. “Let he who is without sin cast the first stone” They cheer on the demise of companies which like any other startup, is looking to gain a foot hold in a highly competitive market place and “tar them all with the same brush” as the old adage goes.

    However, when enforcement actions or publication of enforcement actions / charges arise pertaining to the behavior of incumbents, the silence from these players is deafening.

    Where I come from that is called hypocrisy, plain and simple. Nothing more and nothing less. With this blinkered approach and a failure for these players to not only identify faults within the legacy systems, but to acknowledge that the system is in fact failing and is in need for a drastic overhaul, they too become a huge part of the issue when fighting incumbent powers in our plight to build a better world. They are incumbent actors.

    In recent times, we have seen major alleged infractions of securities regulations by incumbent banks and brokers, with one of the most recent being a charge of “Racketeering” being leveled against JPMorgan, one of the largest and most vocal incumbent players in the financial markets.

    It is also alleged that a European institution, Danske Bank in this case, was responsible for laundering hundreds of billions of dollars through one of their regional offices.

    Ok, some money laundering is to be expected and you cannot catch it all as no system is perfect but come on, hundreds of billions and I suppose no one in their top management knew.

    The overtly large profits which would have been turned over in the regional offices would have stuck out like a sore thumb but I am sure once bonus time came round, they raised a champagne glass in toast to their own success and not a thought went to the thousands of individuals and companies which have been victims of crime, crime which they enabled.

    Money laundering is the washing of funds which are deemed to be proceeds of crime and other illicit activities through a financial network in order to create a façade of legitimacy and have the funds enter the legitimate cash networks and the infrastructures of the financial ecosystem.

    Racketeering is a systematic abuse through criminal activities by a number of players who act in cahoots for profit, this is generally reserved for organized crime syndicates but with the ongoing and systematic abuse by incumbent institutions of regulations and laws, we could well fit these banks and brokers into a class of organized crime albeit a class which is accepted by some and enabled by others.

    ICO Box’s Alleged Securities Violations

    Let’s get back to the case at hand, so ICO Box, it is alleged, has performed an initial coin offering (ICO) to the tune of 14 million USD and has facilitated the funding of other projects to the tune of a 600 million USD give or take a few shekels.

    So there are two definitive aspects to this case.

    The ICOBox ICO

    Ok, performing an ICO is NOT illegal and it never will be illegal. An ICO is just a marketing term which was used to identify a funding mechanism which was centered on Blockchain technology and it is similar to crowdfunding, some would say it is in every definition Crowdfunding.

    Others would claim it is has subtle differences, as an ICO may never make it to the public offering stage due to interest from funds and venture capitalists. Yes, VC’s and Funds participate heavily in ICO’s.

    Why is it not illegal to conduct an ICO? ICO’s are generally conducted globally and in some localities or regions, ICO’s are a perfectly reasonable way of raising funds and are actually enticed to by local governing bodies.

    These governing bodies welcome and embrace Blockchain and the crypto ecosystem and understand that regulations will need to be adapted to enshrine this forward looking movement and to usher in this new technology while maintaining a safe and fair system for all actors who wish to participate.

    That may come as a shock to some Americans, who seem to believe their laws which they have legislated and everyone and everything falls under them.

    Jurisdiction of the SEC in the ICOBox case

    As such, jurisdiction will come into play and proving that ICOBox made an unregistered securities offering and solicited U.S. retail investors with said securities offering must be proven in order for jurisdiction to be taken. Failure to do so prove jurisdiction will stop this charge dead in its tracks.

    In the action it is stated that ICOBox sold over 14 million USD worth of their token ICOS to approximately 2000 investors from the United States and other nations. If this is proven to be true, then there would be no question of jurisdiction and it would be affirmed by the court that it does maintain jurisdiction if the defense lawyers decided to claim this as a defense.

    Then the question would be in determining if the token sale was actually an unregistered sale of securities. This is generally determined through the Howey test and of course any other precedents which have been set before the court case which would have a bearing on affirming the status of being a security or not a security.

    The Howey Test and ICOBox

    In order for a transaction to meet the requirements of a security, they must fall within the parameters of the Howey test. The Howey test dates back to a trial in 1946…yes 1946. What the Howey test looks to do is assert the status of an investment contract upon a transaction and in doing so, imply that the said contract is a security, thus falling under registration requirements and of course, disclosure requirements to the regulatory bodies.

    Additionally, the marketing and fundraising efforts are strictly controlled through a number of rules and regulations as well. Regulation A + being a popular method of funding at the present time.

    So, in order to fail the Howey test all of the following criteria must be met

    1. An investment of money.

    2. In a common enterprise.

    3. With an expectation of profits predominantly from the efforts of others.

    If we look at what has been alleged with relation to the ICO and the offering, we can see why and where the SEC has focus its attention with extracts from their telegram group, interviews, social media use etc.

    I would like to bring your attention to the SEC’s focus on use of social media and other mass media outlets as this is something we have been pushing with regards to compliant marketing. There are clear reasons why a project should not utilize social platform for distribution of marketing materials of an ICO. They are as follows:

    · Social Media users cannot be geographically targeted in general posts/ articles.

    · Social Media users are not classed into existing regulatory frameworks such as accredited or qualified investors (another outdated concept)

    As the SEC outline, their use of social media and publishing of White papers on their own sites is in fact financial promotion of a SECURITY.

    The final aspect which I would look at is how the Sec have alleged that the project is run and will be successful based upon the efforts of the management team. They single out the CEO as an influencer and again look towards public and social posts as affirmation of this.

    This of course is in addition to the company pulling the utility of its coin and making (what the SEC deem to be) false promises based around platform uptake.

    The case will rest with the judge.

    The second aspect of the case is based around the broker dealer licensing and sale of securities to U.S. residents/ citizens for other projects/ clients.

    ICO box offered a full array of products to its clients from marketing to full turnkey services, all of which were ran off its platform. The platform token was used to participate in token sales and it would generate or supply a discount to users of the platform.

    While I am not 100% if they maintain a due diligence on projects or vetted users, this would of course be taken into consideration, however, if they were following the usual crypto line, there would be no Know Your Customer or Accreditation (outdated rule) as they are shunned by the majority of the crypto community for various reasons.

    It is stated that during the advice which was provided by ICOBox, they never pushed any project to register and file disclosures and based this off supposed utility. Now, I have a problem with this.

    The SEC runs a system of you are a security until you have proven utility and as such, everyone needs to register which is in fact, at odds with regulation IMHO.

    So, if a company and its token are deemed to have true utility at a later date by the SEC, then the company has wasted tens of thousands of dollars on legal fees which were not necessary and this of course would stifle innovation through unnecessary regulatory burden.

    With regards to brokering, they state that they actively solicited and attracted investors to ICOBox’s client’s securities offerings (those deemed to be) and to back this up they have also disclosed that Paragon, which was deemed a security offering was a client of the platform.

    Due to ICOBox not being a registered broker dealer or being associated with a registered broker dealer, it is alleged that they in fact acted as broker dealers for securities which in turn was a direct violation of federal securities law.

    So, with all of this information we can see how they SEC have structured its case, they have set jurisdiction, then they have set securities offering and dealing with securities with alleged evidence of infractions on federal law based upon dealing with US investors.

    1. They have not alleged money laundering,

    2. They have not alleged racketeering and even though they draw attention to the fact that they had provided guidance on ICO’s through their DAO publication,

    3. The SEC had not set forth true direction and definition of what defines utility but instead rest their arguments on a test which is nearly 100 years old.

    In doing so, they attack a company which began in an ecosystem which had no real clear definitions of what was the true and valid path to follow, which in turn was due to a lack of co-ordination by regulatory bodies on the international level and an inability of regulatory bodies to act swiftly a provide proper guidance in what was a gray area at the time.

    I wish ICObox the best of luck and note this is an opinion piece and I know nothing.

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