On September 18, 2019, the SEC filed an enforcement action in the U.S. District Court for the Central District of California against ICOBox and its co-founder and CEO (Nikolay Evdokimov) for violation of Sections 5(a) and 5(c) of the Securities Act for the sale of unregistered securities and for violation of Section 15(a) of the Exchange Act for acting as an unregistered broker for clients’ token offerings. The SEC sought a permanent injunction barring future securities violations, disgorgement of all funds from the allegedly illegal conduct and prejudgment interest, and a monetary penalty.
ICOBox is a service provider “for companies seeking to sell their products via ICO/STO crowdsales.” From August 9, 2017, through September 15, 2017, ICOBox allegedly sold approximately US $14.6 million worth of tokens called “ICOS.” The primary selling point allegedly was that ICOS could be swapped for tokens issued by ICOBox’s clients at a 75 percent discount on average.
Applying the test set forth in SEC v. W.J. Howey Co., the SEC alleged that ICOS were unregistered securities because the defendants stated: (1) investors could profit from swapping their ICOS for tokens from future ICOs by ICOBox’s clients at a discount and from trading ICOS on digital asset platforms and (2) ICOS’s success depended on ICOBox’s co-founder and management.
In addition, the SEC alleged that ICOBox and its co-founder “provided unregistered broker services” and “act[ed] as unregistered brokers in connection with ICOBox’s clients’ token sales.” The defendants allegedly facilitated token sales for over 30 clients. For each token sale, the defendants allegedly would help structure, promote, and solicit investors for, the ICO. If the ICO was a success, the defendants would charge the clients “success fees starting at 1.5% of the amount raised.” At least one token sale (i.e., the sale for Paragon Coin, Inc.) allegedly constituted an unregistered securities offering.
The court entered a default against the defendants on October 28, 2019, for failure to respond after a summons was served on them. The court subsequently filed an order to show cause demanding that the SEC file a motion for default judgment by or before January 10, 2020, or else face potential sanctions.