The SEC has repeatedly warned cryptocurrency investors about the market’s vulnerability to large-scale fraud. Likewise, the agency has made it clear that cryptocurrency offerings that function as securities will be treated as such, and thus subjected to scrutiny.
Since SEC officials began making emphatic statements about its jurisdiction over the cryptocurrency space, many companies have been sued in connection with their ICO dealings.
According to estimates, the SEC is looking into the affairs of at least 80 crypticompanies, in search of a variety of violations.
Among the companies whose alleged fraudulent dealings have been exposed by the SEC were:
- PlexCorps, a company that raised $15 million from investors lured by the promise of “the next decentralized worldwide cryptocurrency,” which the SEC believes they never even started developing.
- Maksim Zaslavskiy and the companies he used to sell REcoin, advertised as “The First Ever Cryptocurrency Backed by Real Estate.” Zaslavskiy told potential investors he had raised over $4 million, when in reality, he had only raised $300,000.
- The blockchain-based food review service Munchee and its MUN token. The SEC found evidence of false advertising on Facebook, promising “199% GAINS.”
- AriseBank, a company that claimed to have raised $600 million in an ICO, in its efforts to “revolutionize banking” via cryptocurrency. The SEC alleged the company misled investors about its true activities and intentions, and concealed from them the fact that one of its founders had a criminal record.
- Jon E. Montroll and his platform BitFunder.com. According to evidence introduced by the SEC complaint, Montroll misappropriated funds from users of the platform, stealing over 6,000 bitcoins.
But companies need not have incurred these type of violations to receive a SEC subpoena. The agency is currently making a sweeping effort to show it has jurisdiction over ICOs. It is looking for any companies that may be making misleading claims to attract investors, lying about the valuation of their assets or the amount of investor funds raised.
This should come as no surprise to players in the cryptocurrency space. The SEC has given ample warnings about its areas of concern.
A defense based on the argument that ICOs are not securities will not fare well in the current scenario.
Above all, companies developing and marketing ICOs need to be prepared to hear a knock on the door, compliments of SEC regulators. SEC subpoenas need to be taken seriously. Considering the shocking cases of fraud the agency has already exposed, where investors have been defrauded out of millions of dollars, its regulatory efforts and blanket probes are unlikely to stop.
Companies that receive an SEC subpoena or even an informal inquiry, must be ready to respond with crucial assistance from a cryptocurrency-savvy securities lawyer. A legal professional can obtain specific information as to what the SEC is looking at, and devise a plan to respond efficiently to any concerns regulators may have.
This is still largely uncharted territory for both regulators and cryptocurrency companies, and legal counsel is key to minimize risks.
Facing an SEC subpoena over ICO activities? Cryptocurrency firms should have an experienced securities lawyer interfacing with the SEC to avoid mischaracterization of their attempts to explain ICO related conduct. Herskovits PLLC focuses exclusively on securities law. Nationwide practice.