The U.S. Securities and Exchange Commission Division of Enforcement has released their annual report that included enforcement actions taken against various ICOs and blockchain companies. Outright fraud and the illegal sale of securities were the two forms of illegal activity that ICOs were most often associated with. Twelve of the fifteen noteworthy cyber related enforcement actions undertaken in 2018 involved ICOs, blockchain, or bitcoin.
The guiding principles of the division include focusing on mainstream investors and individual accountability, keeping up with technological change, effective solutions that further enforcement goals, and monitoring resource allocation.
The following are excerpts from the report that pertain to ICOs:
Principle 3: Keep Pace with Technological Change
Led by the Cyber Unit, the Division emerged as a global leader in addressing misconduct relating to digital assets and initial coin offerings (ICOs). We believe our approach to enforcement in this space has been thoughtful and consistent. Importantly, it has provided a template for authorities in other countries, where fraud and misconduct targeting U.S. investors often have been based.
Given the explosion of ICOs over the last year, we have tried to pursue cases that deliver broad messages and have market impact beyond their own four corners. To that end, we have used various tools—some traditional, such as the Commission’s trading suspension authority, and some more novel, such as the issuance of public statements—to educate investors and market participants, including lawyers, accountants, and other gatekeepers. We believe these investor-protection efforts have been successful.
We also have recommended enforcement actions for conduct ranging from registration violations, to unregistered broker-dealer activity, to instances in which the purported use of blockchain-related technology is merely a veneer for outright fraud. A poignant example of our impactful approach is the SEC’s enforcement action against the co-founders of a purported financial services start-up. This action, coupled with the Enforcement Division’s joint statement with the Commission’s Office of Compliance Inspections and Examinations urging caution around celebrity promotion of ICOs, brought an almost immediate end to such promotions. Another example is the SEC’s action against an allegedly fraudulent ICO that targeted retail investors to fund what it claimed to be the world’s first “decentralized bank.” We moved quickly to stop the fraud by obtaining a court order, and the action showcased our ability to obtain a receiver over digital assets.
Principle 5: Constantly Assess the Allocation of Our Resources
The results from the past year are derived both from the Division’s dedicated staff rising to the challenge and from an effective allocation of resources. We shifted resources into market segments presenting emerging risks, including cyber threats and ICOs. We implemented innovative initiatives, such as the SCSD Initiative, which we expect to result in the return of substantial funds to retail investors. And we have paid careful attention to case selection, attempting to open and pursue investigations that are likely to have the most meaningful impact for investors and the markets.
Policing Cyber-Related Misconduct – ICOs and Digital Assets
The Division also remains focused on issues related to ICOs and digital assets. In just a few years, the prevalence of crypto-asset offerings, including ICOs, has exploded. But exuberance around these markets can sometimes obscure the fact that these offerings are often high-risk investments. For instance, the issuers may lack established track records, viable products, business models, or the capacity for safeguarding digital assets from theft by hackers. And some of the offerings are simply outright frauds cloaked in the veneer of emerging technology.
The Enforcement Division recognizes the need to balance its mission to protect investors from the risk posed by fraud and registration violations against the risk of stifling innovation and legitimate capital formation.4 Generally, the Division’s approach to ICOs and digital assets has taken the following forms:
- The Division has used public statements to send messages to the ICO and digital asset marketplace on issues such as the potentially unlawful promotion of ICOs by celebrities and others, and the risks associated with online trading platforms for digital assets.
- When warranted, the Division has recommended enforcement actions to the Commission in matters involving ICOs. As of the close of FY 2018, the SEC had brought over a dozen stand alone enforcement actions involving digital assets and ICOs. While many of these cases have involved allegations of fraud, the Division also has pursued enforcement actions to ensure compliance with the registration requirements of the federal securities laws. In the past year, the DIVISION OF ENFORCEMENT ANNUAL REPORT | Division has opened dozens of investigations involving ICOs and digital assets, many of which were ongoing at the close of FY 2018.
- The Division’s focus also extends beyond the issuers of ICOs. In FY 2018, the Commission announced a settled order against two individuals who ran a self-described “ICO Superstore” that operated as an unregistered broker-dealer and participated in unregistered offerings. On the same day, the Commission filed a settled action against a hedge fund manager that violated an investment company registration provision based on its investments in digital assets.
- The Division also has recommended that the Commission use its trading suspension authority to prevent investors from being harmed by possible scams. In both FY 2017 and FY 2018, the Commission suspended trading in the stock of over a dozen publicly traded issuers because of questions concerning, among other things, the accuracy of assertions regarding their investments in ICOs and operation of cryptocurrency platforms.
- The co-founders of a purported financial services start-up with allegedly orchestrating a fraudulent ICO that raised more than $32 million from thousands of investors.
- Titanium Blockchain Infrastructure Services Inc. and its president, a self-described “blockchain evangelist,” for an alleged ICO fraud that raised as much as $21 million from investors in and outside the U.S.
- A recidivist securities law violator and his company who allegedly raised up to $15 million from thousands of investors in an ICO by falsely promising a 13-fold profit in less than a month.
- A company selling digital tokens to investors to raise capital for its blockchain-based food review service, which halted its ICO after being contacted by the Division of Enforcement and agreed to an order in which the Commission found that its conduct constituted unregistered securities offers and sales.
- AriseBank and its co-founders for allegedly selling a fraudulent ICO that targeted retail investors to fund what it claimed to be the world’s first “decentralized bank”
- A former bitcoin-denominated platform and its operator with allegedly operating an unregistered securities exchange and defrauding users of that exchange, and the operator of the exchange with allegedly making false and misleading statements in connection with an unregistered offering of securities.
- Longfin Corp., its CEO, and three other affiliated individuals for allegedly illegal distributions and sales of restricted shares of Longfin Corp.
- Two men who allegedly profited from illegal sales of stock of a company claiming to have a blockchain-related business.
- The founder of a company who perpetrated a fraudulent ICO to fund oil exploration and drilling in California.
- A hedge fund manager for violating the investment company registration provisions based on its investments in digital assets.
- TokenLot LLC, a self-described “ICO Superstore,” and its owners for acting as unregistered broker-dealers.
- An international securities dealer and its Austria-based CEO for allegedly violating the federal securities laws in connection with security-based swaps funded with bitcoins.
The entire report can be read here: https://www.sec.gov/files/enforcement-annual-report-2018.pdf