Crypto tokens were securities, settlement says

The operators of a failed blockchain development project agreed to pay more than $1.5 million in sanctions and will be permanently banned over an unregistered offering of crypto tokens, which, they admitted, functioned as securities.

The Capital Markets Tribunal approved a settlement with Nicholas Agar and Paul Ungerman, the operators of Axia Project who admitted to violating securities law by distributing securities without a prospectus, trading without registration, and making misleading promotional statements.

According to the Ontario Securities Commission (OSC), the Axia Project raised approximately US$41 million from investors, including $9 million in Ontario, from the sale of crypto tokens Axia Coins. The tokens were supposed to be used as the medium of exchange on its planned blockchain platform. However, the regulator alleged that they promoted the tokens as investments, too.

In the settlement, Agar and Ungerman admitted that the tokens served as securities, that they were issued without a prospectus, and that they traded without registration.

In its reasons, the tribunal noted that the agreement marks the first time the OSC has settled allegations relating to the promotion and sale of crypto tokens, and that the tribunal hasn’t ruled on any cases involving the sale of crypto tokens and whether they count as securities.

“While we have not had the benefit of detailed argument concerning the attributes of the Axia Coin, we are satisfied that the parties to this settlement agreement have admitted and agreed to circumstances that justify the imposition in the public interest of sanctions related to the promotion and sale of the coin and rights to receive the coin in future,” the panel said.

The project’s founders also admitted to making misleading statements about the purported assets backing the tokens — including that it held over US$29 billion in reserves — and to making misleading statements to regulators about the project, which prevented early detection of the misconduct.

In late 2022, the Axia Project was suspended and an outside governance and compliance firm was hired to review it. As a result of that review, in March 2023, the project was terminated and efforts to wind it down were started, with the remaining funds to be returned to investors.

The tribunal said the effort to wind down the project and return money to investors was a mitigating factor in the case, along with the fact that the respondents cooperated with the regulator’s investigation and accepted responsibility for their misconduct by reaching a settlement.

To settle the OSC’s case, Agar and Ungerman each agreed to pay $550,000 penalties. Ungerman agreed to disgorge $318,686 to the OSC, and Agar agreed to disgorge $50,000. Both men also agreed to pay $50,000 in costs.

Ungerman has paid the sanctions ordered against him, and Agar has paid $200,000, with the balance to be paid in nine monthly installments.

In addition to the financial sanctions, they also agreed to permanent trading bans, director and officer bans, and registration bans.

“In our view, given the mitigating factors, the significant financial sanctions, the permanent market bans, Agar’s irrevocable direction, and the avoidance of the time and expense required for a contested hearing, it is in the public interest for us to approve the settlement,” the tribunal said in its reasons.

“The settlement will, in our view, achieve specific and general deterrence and convey a strong message to market participants that compliance with Ontario securities laws is required in the context of the promotion and sale of cryptocurrency tokens.”