Enforcement Action

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On May 29, the SEC announced that it had secured injunctive relief halting an allegedly “ongoing fraud” involving an unregistered, non-exempt ICO that raised as much as $21 million in cryptoassets.

The SEC’s complaint charges Titanium Blockchain Infrastructure Services, Inc., EHI Internetwork and Systems Management, Inc. and Michael Stollery, (collectively, the “Titanium defendants”) with fraud in connection with the purchase, offer or sale of securities under Sections 10 and 17 of the Securities Exchange Act and the unregistered offer and sale of securities under Section 5 of the Securities Act. 

Last week, former CFTC Chairman Gary Gensler explained in remarks at M.I.T. that he believes the second and third most widely used virtual currencies—Ether and Ripple—may have been issued and traded in violation of securities regulations.  This comes on the heels of a crackdown on cryptocurrency-related securities by the SEC, which is particularly focused on initial coin offerings (ICOs).  For fund managers, we believe the increased regulatory pressure will be felt in some expected, and some not-so-expected, ways.

ICO enforcement is trending: The SEC’s Cyber Unit has ramped up enforcement pressure, issuing dozens of subpoenas and information requests to technology companies and advisers involved in the ICO market.  The requests have sought information about the structure for sales and pre-sales of ICOs.  This uptick in enforcement pressure isn’t surprising, especially given Chairman Clayton’s repeated warnings that participants in the ICO space are not complying with the required securities laws (for example, notably stating that he has yet to see an ICO that “doesn’t have a sufficient number of hallmarks of a security.”)  There are no signs the SEC will slow down its scrutiny of crypto-related assets.  The SEC has already indicated that it will devote significant resources to policing the ICO market. 

The Federal Trade Commission (FTC) recently sought and received a temporary restraining order (TRO) against four promoters of alleged pyramid schemes involving cryptocurrencies. The promoters were charged with violating the FTC Act’s prohibition on unfair or deceptive acts or practices in or affecting commerce.

The FTC’s complaint (filed under seal…

Earlier this month, Judge Jack B. Weinstein of the U.S. District Court for the Eastern District of New York entered a preliminary injunction order against Patrick McDonnell and his company, CabbageTech, Corp. (together, the “Defendants”). In a landmark ruling, the order upheld the CFTC’s position that “virtual currencies”…

BitConnect International, PLC had a somewhat unique business model, even for an industry known for its unconventional nature.  On its face, BitConnect functioned as an exchange. However, the real purpose of the platform, and what led to its ultimate downfall, was its lending program. BitConnect “borrowed” the crypto investments…

In its latest effort to combat scams in the initial coin offering (ICO) space, the SEC announced today that it has obtained a court order cutting off AriseBank’s ICO of “AriseCoin” tokens, appointing a receiver over AriseBank and freezing AriseBank’s and its co-founders’ digital and other assets. The SEC’s complaint…

The CFTC and SEC made numerous headlines Friday in their ongoing efforts to provide regulatory oversight of cryptocurrency markets. The CFTC announced the filing of two civil enforcement actions against allegedly fraudulent cryptocurrency-related investment schemes. The SEC’s Division of Investment Management, meanwhile, issued a letter raising concerns about registered investment companies’ (including ETFs’) investments in cryptocurrencies and cryptocurrency-related assets. And the SEC and CFTC issued a joint statement emphasizing their collective aim to root out fraud in the offer and sale of digital instruments, regardless of whether such instruments are classified as digital “currency,” “tokens,” or otherwise.

The SEC took two additional steps today in its regulation and oversight of the initial coin offering (“ICO”) and cryptocurrency markets.

In the SEC’s latest action targeting an ICO, the SEC Enforcement Division’s new Cyber Unit intervened in an attempted ICO by Munchee, Inc., an online food review service…