The U.S. Securities and Exchange Commission said Friday it has settled a lawsuit with two companies that undertook unregistered initial coin offerings in 2017 as the market for ICOs continues to decline.

The cases related to unregistered ICOs from CarrierEQ Inc., doing business as Airfox, which raised $15 million for an online advertising token, and Paragon Coin Inc., which raised $12 million for cannabis industry blockchain token.

In both cases, the SEC argued that the companies failed to register the tokens as securities when offering them to investors, something they were required to do under securities law. The settlement of the lawsuit sees each company paying a $250,000 fine, providing refunds to investors, registering their tokens under securities law and filing compliance reports periodically with the SEC for a period of no less than one year.

“By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws,” Steven Peikin, co-director of the SEC’s Enforcement Division, said in a statement Friday.

Reuters noted that the case is of particular interest because it’s the first time the SEC has imposed penalties against legitimate tech startups that skirt the regulatory rules through ICOs.

Maxwell R. Rich, regulatory advisor at Coinlist & deputy general counsel at Republic, told SiliconANGLE that industry participants should study this settlement closely. “It provides good guidance on how to avoid violating U.S. federal securities laws, showing the pitfalls of not following them and more interestingly, may provide novel guidance for token issuers looking to register their tokens with the SEC,” he said.

Registered securities are generally freely tradable, he noted, citing an IPO issuer such as Google. And then anyone can purchase shares of Alphabet.

“The problem is that to date, no token has been registered with the SEC through the IPO process,” he said. “That’s why this settlement is so interesting. It’s indicating there is an alternative method for issuers to register their security tokens, whether they are exploring any digital assets securities offerings or are looking for ways to bring their previously unregulated ICO into compliance.”

The news comes as a new report claims that the number of ICOs in the third quarter dropped by 48 percent from the second quarter.

CCN reported that more than half of the ICO projects that launched in the quarter managed to raise up to $100,000, while only a tiny number were listed on crypto exchanges. Of the 597 projects staged in the third quarter, only 24 were listed on exchanges.

The number reflects a weakening overall ICO market that according to a report Oct. 3 has seen tech companies switch back to traditional venture capital for their blockchain startups.

Image: Paragon Coin