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JANUARY 12, 2020 / 00:24 UTC
LONDON (Fintech Zoom) – ICOBOX – The U.S. Securities and Exchange Commission (SEC) is seeking more than $16 million in penalties from ICOBox for selling “ICOS” tokens as unregistered securities.
According to a filing in the United States District Court for the Central District of California, the SEC seeks a default judgment against Cayman Islands-based ICOBox and founder and CEO Nikolay Evdokimov, asking the judge to approve penalties as well as a lifetime ban from marketing or selling securities in the U.S.
The regulator also wants Evdokimov to pay a separate civil penalty of just under $190,000.
Defendants’ Current Status
ICOBox and Evdokimov have all but disappeared from the U.S. ICOBox is nolonger registered as a corporation with the Cayman Islands and its registered agentfor service of process has resigned with no replacement. Longo Decl. ¶¶ 11-13, Exs.8-9. Its website, which was operational at the time the Complaint was filed, is no longer accessible. Id. ¶ 14. After service of the Complaint was effected at ICOBox’soffice, the premises was vacated, with several months’ rent left unpaid. Id. ¶¶ 4-5, 8,Ex. 5. Efforts to email Evdokimov’s last known address, firstname.lastname@example.org, garnered no response (though no emails bounced back). Id. ¶¶ 9-10, Exs. 6-7
Section 15 violations.
Both defendants acted as unregistered brokers. They actively solicited investors for their clients, including Paragon, by advertising the offerings onICOBox’s website and social media accounts, sharing their clients’ promotional materials, white papers, and links to their websites for placing investments, and publicizing their clients’ offerings through crypto-focused publications and review sites. They advised potential investors about the merits of the clients’ tokens, and enabled ICOS token holders to swap for the clients’ new tokens through their platform, thereby acting as the link between the issuers and the investors. Defendants charged transaction-based compensation in the form of “success” fees tied to the amount of funds raised from investors in client ICOs.
Thus, the total amount of disgorgement and prejudgment interest that should be assessed jointly and severally against defendants is $16,059,428.99.
Litigation Release No. 24601 / September 19, 2019 – Securities and Exchange Commission v. ICOBox and Nikolay Evdokimov, No. 19-cv-08066 (C.D. Cal. filed September 18, 2019)
In a complaint filed on Sept. 18, 2019, the SEC had sued ICOBox and Evdokimov for operating an unregistered securities offering of roughly $14.6 million worth of digital assets in 2017, and operating as an unregistered securities broker.
The Securities and Exchange Commission sued ICOBox and its founder Nikolay Evdokimov for conducting an illegal $14 million securities offering of ICOBox’s digital tokens and for acting as unregistered brokers for other digital asset offerings.
According to the SEC’s complaint, ICOBox raised funds in 2017 to develop a platform for initial coin offerings by selling, in an unregistered offering, roughly $14.6 million of “ICOS” tokens to over 2,000 investors. The complaint alleges that defendants claimed the tokens would increase in value upon trading and that ICOS token holders would be able to swap them at a discount for other tokens promoted on the ICOBox platform. According to the complaint, the ICOS tokens are virtually worthless. The complaint further alleges that ICOBox failed to register as a broker but acted as one by facilitating initial coin offerings that raised more than $650 million for dozens of clients.
The SEC’s complaint charges ICOBox and Evdokimov with violating the registration requirements of Sections 5(a) and (c) of the Securities Act of 1933 and Section 15(a) of the Securities Exchange Act of 1934 and seeks injunctive relief, disgorgement with prejudgment interest, and civil money penalties.
The SEC’s investigation was conducted by Brent W. Wilner and was supervised by Victoria A. Levin, Alka N. Patel, and Michele Wein Layne of the Los Angeles Regional Office. The litigation is being conducted by Amy J. Longo of the Los Angeles Regional Office.
- This action concerns the unregistered offering and unregistered broker activities of securities through so-called “token sales” or “initial coin offerings” (“ICOs”), by Defendants ICOBox (“ICOBox”) and Nikolay Evdokimov (“Evdokimov,” collectively “Defendants”). Since August 2017, ICOBox and Evdokimov have engaged in both the unregistered offering of securities through a $14.6 million ICOBox token sale, as well as the unregistered broker activities related to securities offered by ICOBox’s clients, exposing thousands of investors to risky investments without providing the necessary information and protections required by the federal securities laws.
- ICOBox proclaims to be a “Blockchain Growth Promoter and Business Facilitator for companies seeking to sell their products via ICO crowdsales”—in other words, an incubator for digital asset startups. A self-described blockchain expert, Evdokimov, has acted as the company’s co-founder, CEO, and “vision director,” among other titles. To raise funds to develop its newly formed enterprise, between August 9, 2017 and September 15, 2017, ICOBox offered and sold approximately $14.6 million worth of digital assets it called “ICOS” tokens to over 2,000 investors in the United States and globally through the company’s website, https://icobox.io.
- ICOBox and Evdokimov told investors that the offering proceeds would be used to cover the cost of providing ICOBox’s planned services to digital asset startups that could not afford them. Defendants claimed that ICOBox would be successful—and the ICOS tokens valuable—due to the efforts of ICOBox’s management team, who would curate potential digital asset projects and attract “100+” clients per month. As of the date of ICOBox’s offering, ICOBox had yet to support a single token sale to completion.
- According to ICOBox’s promotional materials, the primary benefit to ICOS token holders would be the ability to swap the ICOS tokens through ICOBox’s website for tokens issued by ICOBox’s anticipated clients, at an average 75% discount. ICOBox also emphasized that the ICOS tokens would be immediately transferable and would increase in value when the company placed the tokens on various digital asset trading platforms.
- Defendants’ ICOS offering followed the publication of the SEC’s Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (Exch. Act Rel. No. 81207) (July 25, 2017) (the “DAO Report”), which put the digital asset industry on notice that many digital assets such as the ICOS tokens are securities under SEC v. W.J. Howey Co., 328 U.S. 293 (1946), and subject to the federal securities laws, including registration requirements.
- ICOBox and Evdokimov were well-aware of the DAO Report by the time of the ICOS offering, publicly discussing its significance, including in an interview with Reuters and in communications with potential investors. Nevertheless, ICOBox did not register the ICOS offering or qualify for any exemption from registration, instead claiming the ICOS tokens were not securities or had an “exemption” because of an unspecified “utility.”
- By not registering the ICOS offering, the company deprived investors of meaningful information that would be found in a registration statement that investors could use to assess the company’s prospects.
- ICOBox’s results turned out to be less rosy than its promotional materials forecast. ICOBox has facilitated far fewer than 100 clients’ token sales total—let alone 100 per month. In addition, the company has discontinued the ability to swap ICOS tokens, rendering them useless. ICOS tokens now trade, if at all, at approximately $2.41, a fraction of the offering purchase price—roughly 1/20th of the average purchase price during the offering (and roughly 1/30th of the highest price paid by investors during the final days of the ICO).
- Defendants also have provided unregistered broker services and continue to act as unregistered brokers in connection with ICOBox’s clients’ token sales.
- Although nowhere near as successful as predicted, Defendants did launch the ICOBox platform for fostering other companies’ creation and sale of digital assets. Since August 2017, ICOBox and Evdokimov have facilitated the token sales of over 30 clients, which have collectively raised over $650 million from investors.
- These facilitation services have included structuring, promoting, and soliciting investors for the clients’ offerings. If a client’s token sale successfully raised funds, ICOBox charged the client success fees starting at 1.5% of the amount raised.
- The token sale conducted by at least one of these clients, Paragon Coin, Inc. (“Paragon”), constituted a securities offering under Howey.
- By actively soliciting and attracting investors to ICOBox’s clients’ securities offerings in exchange for transaction-based compensation without registering as or associating with a registered broker-dealer, Defendants engaged in unregistered broker activities that violated the federal securities laws.
- Defendants’ conduct is ongoing—they continue to solicit clients for their facilitation services online, and even have broadened the scope of their services to support so-called “security token sales” or “STOs,” reflecting that they will continue to flout the registration requirements absent judicial intervention. STOs are a form of digital asset offering like ICOs, in which the token typically affords investors certain financial rights akin to a company stock, such as dividends.
- Defendants continue to expose investors to risky securities without complying with provisions of the federal securities laws designed to ensure investors have adequate information to evaluate such investments.
- By this conduct, Defendants have violated Sections 5(a) and 5(c) of the Securities Act for the unregistered offering of ICOS tokens, and Section 15(a) of the Exchange Act for the unregistered broker activities related to Defendants’ clients’ tokens.
- By this action, the SEC seeks to obtain disgorgement and penalties to redress Defendants’ violations of the securities laws, as well as to enjoin Defendants’ unlawful conduct to prevent further harm to investors.
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