In early March, the Manhattan U.S. Attorney unsealed indictments against the leaders of the Bulgarian-based “purported” cryptocurrency “OneCoin” on wire fraud, money laundering and federal securities fraud charges relating to an alleged $3 billion pyramid scheme devised to market OneCoin. OneCoin’s lawyer has also been charged with conspiracy to commit money laundering for allegedly conducting financial transactions with some of the proceeds of the scheme to conceal the unlawful activities.
Securities
Two New Bitcoin ETF Proposals Pending as Cryptocurrency Markets Mature
Two recent proposals for bitcoin exchange-traded funds (“ETFs”) are vying to become the first to receive approval from the U.S. Securities and Exchange Commission (“SEC”) – one filed by CBOE BZX Exchange, Inc. (“CBOE”) and the other by NYSE Arca, Inc. (“NYSE Arca”). The SEC has yet to approve a cryptocurrency ETF, although several applications were filed throughout 2018.
A bitcoin ETF would allow investors to easily invest in bitcoin without needing to directly buy and manage the cryptocurrency themselves, potentially ushering in additional capital and enabling a wider range of institutional investors to tap into the market.
Once the proposals are published in the Federal Register, the SEC has an initial 45 days from the date of publication to issue a decision or request an extension, with total time not to exceed 240 days.
Gladius Escapes Fines for Unregistered ICO after Self-Reporting to the SEC
On February 20, 2019, the SEC announced that it settled charges against Gladius Network LLC (“Gladius”) for failing to register non-exempt offers and sales of securities in violation of Sections 5(a) and 5(c) of the Securities Act. While the SEC has previously settled charges relating to unregistered ICOs, this is one of few occasions since its 2017 DAO Report that the SEC refrained from imposing civil monetary penalties for an ICO that it determined violated the registration requirements of the federal securities laws.
A Taxonomy of the Proposed Token Taxonomy Act
On December 20, 2018, a bipartisan pair of Congressmen, Warren Davidson (R-OH) and Darren Soto (D-FL), introduced bill H.R. 7356 to enact the Token Taxonomy Act (the “Act”). The Act proposes several amendments to federal securities and tax laws that are intended to clarify how cryptoassets should be treated thereunder. Below, we discuss the key provisions of the Act and their potential implications for cryptoasset market participants. Emphasis is placed on “potential” because, as we will discuss, the Act will likely require certain revisions, as well as substantial political support, before becoming effective law.
Lawsuit Alleging that LATX Tokens are Securities Survives Motion to Dismiss
On December 10th, 2018, a U.S. District Judge for the District of New Jersey denied Latium Network, Inc. (“Latium”) and its co-founders’ motion to dismiss a class action alleging violations of Section 5 of the Securities Act of 1933 (the “Act”) for offering and selling unregistered securities in the form of Latium X (“LATX”) tokens.
First Punch: Floyd Mayweather and DJ Khaled Settle with SEC Over Unlawful Touting of ICOs
The SEC recently announced its settlement of charges against boxer Floyd Mayweather and producer DJ Khaled for their failure to disclose payments they received for promoting Initial Coin Offerings (ICOs) on their social media accounts.
The federal securities laws contain an “anti-touting provision,” which regulates paid promotions of securities offerings. Specifically, Section 17(b) of the Securities Act of 1933 makes it unlawful for a person to “publish, give publicity to, or circulate any notice…or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received…without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.” Importantly, the provision applies even to those not directly offering a security for sale. The SEC’s orders instituting cease-and-desist proceedings against Mayweather and Khaled both cited violations of Section 17(b).
According to the charges, Mayweather failed to disclose $300,000 he received from three ICO issuers. He received $100,000 from Centra Tech Inc. for posting on his social media accounts that “Centra’s…ICO starts in a few hours. Get yours before they sell out, I got mine and as usual I’m going to win big with this one!” Mayweather promoted ICOs on his social media accounts a number of other times and even dubbed himself “Floyd Crypto Mayweather” in one post (not to be confused with his usual moniker, Floyd “Money” Mayweather). Khaled also received $50,000 from Centra for posts calling Centra an “ultimate winner” and a “game changer.” Centra has been the subject of its own SEC scrutiny, with the SEC filing a civil action against Centra’s founders and the U.S. Attorney’s Office for the Southern District of New York filing corresponding criminal charges.
First Decision in Class-Action Context Concludes Digital Tokens Can Be Securities
For digitally savvy investors itching to know whether U.S. courts would treat crypto-tokens as securities subject to the regulatory requirements of the Securities Act of 1933, the wait is over—sort of. The first federal judge to decide the issue in the class-action context landed on the same side as the SEC did back in 2017, finding that the virtual tokens in the case could be characterized as securities. We discussed the SEC’s 2017 report in a previous article. See Margaret A. Dale and Mark D. Harris, The SEC Concludes that Digital Tokens May Be Securities, NYLJ, Aug. 8, 2017.
On June 25, 2018, Magistrate Judge Andrea M. Simonton of the Southern District of Florida issued this cutting-edge opinion in Rensel v. Centra Tech. Her Report and Recommendation (R&R) considered a motion for a temporary restraining order to safeguard the proceeds from an initial coin offering (ICO). The underlying shareholder class action alleged that Centra Tech, a Florida-based technology start-up company, and several of its founders and executives, had violated various provisions of the Securities Act. To reach her decision, Judge Simonton analyzed whether the tokens Centra Tech offered during the course of its ICO were securities for purposes of the Securities Act (despite the defendants conceding the point for purposes of the motion).
SEC Director William Hinman: “Current offers and sales of Ether are not securities transactions”
At last week’s Yahoo! All Markets Summit in Palo Alto, SEC Division of Corporation Finance Director William Hinman delivered a speech sure to send shockwaves through the crypto world. Applying the Howey test (which sets forth the elements necessary for determining whether a transaction involves the offer or sale of…