## Facts

- CarrierEQ, Inc., doing business as AirFox, developed a mobile advertising application in which users could earn “AirTokens,” ERC-20 tokens on the Ethereum blockchain.
- AirFox conducted an initial coin offering (ICO) from approximately August to October 2017, selling AirTokens online and raising about $15 million from more than 2,500 purchasers, including U.S. investors.
- AirFox marketed the ICO through a whitepaper, its website, and social media, describing plans to build an “AirToken ecosystem” and expand into additional markets.
- Marketing materials emphasized that AirTokens would be tradeable on digital asset trading platforms and that token value could increase as AirFox developed the ecosystem; AirFox also offered discounts to early purchasers.
- AirFox ran a “bounty” program that paid AirTokens to online promoters in exchange for marketing services, resulting in hundreds of promoters publicizing the ICO in multiple languages.
- AirFox did not file a registration statement for the AirToken offering and did not conduct the offering pursuant to an exemption from registration.
- The SEC instituted administrative cease-and-desist proceedings under Securities Act § 8A; AirFox submitted an offer of settlement that the SEC accepted, with findings made without admitting or denying (except as to jurisdiction).

## Issues

1. Whether AirTokens, as offered and sold in the ICO, were “securities” as investment contracts under Securities Act § 2(a)(1).
2. Whether AirFox violated Securities Act §§ 5(a) and 5(c) by offering and selling AirTokens without an effective registration statement or a valid exemption.

## Decision

- The SEC found that AirTokens were offered and sold as investment contracts and therefore were securities under Securities Act § 2(a)(1).
- The SEC found that AirFox violated Securities Act §§ 5(a) and 5(c) by offering and selling AirTokens in an unregistered offering without an applicable exemption.
- The SEC ordered AirFox to cease and desist from future violations of Securities Act §§ 5(a) and 5(c).
- The SEC imposed a civil money penalty.
- The SEC required undertakings including registering AirTokens as a class of securities under the Exchange Act and creating a claims process for ICO purchasers to seek refunds, along with related reporting/cooperation obligations.

## Legal Principles

- A digital token may be a security if, under the economic reality of the transaction, it meets the investment-contract test: an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others.
- Promotional emphasis on secondary-market trading, potential appreciation, issuer managerial efforts, and development of an ecosystem may support a finding that purchasers reasonably expected profits from the issuer’s efforts.
- Offering and selling securities through broad internet solicitation to large numbers of purchasers, including U.S. investors, generally requires registration unless the issuer proves an available exemption.
- Securities Act § 5 prohibits offers and sales of securities in interstate commerce absent an effective registration statement or an applicable exemption; administrative relief may include cease-and-desist orders, civil penalties, and remedial undertakings designed to provide investor redress and bring the issuer into compliance.

## Conclusion

The SEC determined that AirFox’s 2017 ICO involved the unregistered offer and sale of securities because AirTokens were marketed and sold as investment contracts under Howey, and it imposed a cease-and-desist order, a civil penalty, and compliance and investor-remediation undertakings including token registration and a refund claims process.


In re CarrierEQ, Inc. (AirFox), Securities Act Release No. 10575, 2018 WL 6017664 (S.E.C. Nov. 16, 2018)