Crypto Startup Accused of Illegal Fundraising Ordered to Refund Investors

WASHINGTON—A technology startup that raised nearly $13 million at the peak of investor demand for unregulated cryptocurrencies agreed to pay a fine and provide more transparency about its finances and business plan.

Blockchain of Things Inc. also agreed Wednesday to offer its original investors their money back, a feature of other settlements the Securities and Exchange Commission has reached with crypto startups whose fundraising efforts were deemed illegal.

While the company could face millions in investor refunds, the cost of the settlement depends on how many investors respond. Many traders who bought cheap tokens during the heyday of 2017’s bitcoin boom, hoping to score quick gains, may not respond to a claims process to seek compensation.

The company also said the SECgave it a waiver that allows it to efficiently raise money from private investors in the U.S., in transactions that are typically unregulated.

Under the agreement that Blockchain of Things reached with the SEC, the company will pay a $250,000 fine without admitting or denying the SEC’s allegations and assume most of the disclosure obligations that public companies face. It will have to disclose its finances in a regulatory filing known as a registration statement and update investors quarterly on its financial condition.

Blockchain of Things didn’t offer “investors with the information they were entitled to receive in connection with a securities offering,” said Carolyn Welshhans, as associate director for enforcement at the SEC. “We will continue to consider appropriate remedies, such as those in today’s order, to provide investors with compensation and required information.”

Blockchain of Things sold its digital tokens, a financing method similar to selling stock, even after the SEC warned in 2017 that startups were skirting investor-protection rules by using the tactic, the agency said.

The firm’s token sale mostly involved overseas investors, showing how the SEC’s enforcement actions in the cryptocurrency market continue to target cross-border deals. Blockchain of Things raised just $600,000 from U.S. investors, while raising over $12 million from token purchasers overseas, according to a settlement order and the company’s chief executive officer. The tokens sold to non-U.S. investors didn’t have any restrictions to prevent them from being resold to American investors, according to the settlement order. The firm eventually sold tokens to more than 1,380 people, the order says. Blockchain of Things provides technology tools to help other companies that want to build applications for the computer network that powers bitcoin, the world’s most valuable cryptocurrency. In a statement, the New York-based company said its settlement “gives Blockchain of Things the path forward to full compliance with the U.S. securities laws and clears the way for Blockchain of Things to pursue its continued vision.” Three other startups whose token sales were deemed illegal by the SEC earlier agreed to similar settlements to end enforcement investigations. In one case, Boston-based Airfox announced Tuesday that only 174 of 2,500 token investors responded to a claims process offering refunds. The company said it would pay about $3.3 million to 163 investors with valid claims, according to a regulatory filing. Airfox raised about $15 million when it sold its digital token in 2017. Airfox has the cash to pay the claims and continue to do business, the filing stated. But one other startup, Gladius Network LLC, called it quits after burning through millions and struggling to meet the terms of its settlement with the SEC.

Write to Dave Michaels at dave.michaels@wsj.com

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Crypto Startup Accused of Illegal Fundraising Ordered to Refund Investors

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