Token Sales

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In its February 2023 discussion paper (DP23/2) relating to the UK regulatory regime for asset management, the UK’s Financial Conduct Authority (“FCA”) briefly touched on fund tokenisation as an area of technological drive and change in the fund management industry. Please refer here to our update on that discussion paper.…

With the enduring popularity of certain NFTs and the promise of their use in the Metaverse and beyond, the hype around the new technology has been accompanied by rising concerns over NFTs being the centerpiece of traditional financial crimes like money laundering and wire fraud.  For example, on June 30th, 2022 the Justice Department indicted six individuals in four separate cryptocurrency fraud cases, which altogether involved over $130 million of investors’ funds. These indictments include allegations of a global Ponzi scheme selling unregistered crypto securities, a fraudulent initial coin offering involving phony associations with top companies, a fraudulent investment fund that purportedly traded on cryptocurrency exchanges, and the largest-known Non-Fungible Token (NFT) money laundering scheme to date.

Cryptocurrency, social media, and celebrity or influencer endorsements have all been top of mind recently, including for advertisers. A newly filed lawsuit is asking a federal court to consider the intersection of these areas, with potential implications for advertisers looking to expand into the cryptocurrency space. EthereumMax executives (“Executive Defendants”)…

In its first enforcement action of the year involving ICOs, the U.S. Securities and Exchange Commission (SEC) charged two companies and their founder for violations of antifraud and registration provisions of the federal securities laws in connection with an initial coin offering (ICO).  On January 6, 2022, the SEC announced charges against Australian citizen Craig Sproule and two companies he founded, Crowd Machine, Inc. and Metavine, Inc. (collectively, the Defendants), for making materially false and misleading statements in connection with an unregistered offer and sale of digital asset securities in an ICO.  (SEC v. Crowd Machine, Inc., No. 22-00076 (N.D. Cal. filed Jan. 6, 2022)).

These charges add to the SEC’s growing list of enforcement actions that target unregistered offerings of digital assets.  ICO activity peaked in 2017, when hundreds of issuances raised an estimated $5 billion from investors.  Since that time, scrutiny from the SEC has cooled this practice. However, the SEC remains vigilant in taking action against unregistered ICOs, based on its view that digital tokens are likely to be securities. In remarks last year, SEC Chairman Gary Gensler voiced agreement with former SEC Chairman Jay Clayton’s position on ICOs: “To the extent that digital assets like [initial coin offerings, or ICOs] are securities — and I believe every ICO I have seen is a security — we have jurisdiction, and our federal securities laws apply.”

On November 10, 2021, the SEC announced that it had instituted proceedings against a Wyoming-based decentralized autonomous organization (DAO) to halt its registration of two digital tokens, alleging that disclosure in the organization’s registration statement was deficient and contained materially misleading statements. (In the Matter of American CryptoFed DAO LLC, No. 3-20650 (SEC Order Nov. 10, 2021)).  Without the SEC’s latest action, the issuer’s Form 10 filing was scheduled to become effective on November 15, 2021 (sixty days from the initial filing date).  The action against American CryptoFed DAO LLC (“CryptoFed”) serves as a clear reminder that cryptocurrency remains in the SEC’s crosshairs, and token issuers must carefully consider regulatory risk when launching new products.

On August 6, 2021, the Securities and Exchange Commission (SEC) announced that it had charged two men, Gregory Keough and Derek Acree, and their company, Blockchain Credit Partners, doing business as DeFi Money Market (collectively, the “Respondents”), for unregistered sales of more than $30 million of securities using smart contracts and so-called “decentralized finance” (DeFi) technology and for making false and misleading statements about their business to investors in violation of the federal securities laws. (In re Blockchain Credit Partners, No. 3-20453 (SEC Order Aug. 6, 2021)).

In recent days, many eyeballs were closely watching the drama behind the cryptocurrency taxation and transparency measures contained in the Senate’s infrastructure bill  and are still digesting SEC Chair Gary Gensler’s recent remarks before the Aspen Security Forum that offered some clues on where the agency will go with respect to cryptocurrency regulation and enforcement. Meanwhile, the SEC continued its enforcement efforts to shut down what it deems fraudulent and unregistered securities offerings involving digital assets. After ceasing operations in February 2021, Respondents consented to a cease-and-desist order that includes disgorgement totaling almost $13 million and civil penalties of $125,000 each of the individual Respondents.  The SEC’s order provides another example of how the now-familiar investment contract analysis applies to tokens, with some additional insights on the impact of voting rights under the Howey test and a further analysis of tokens as notes.

The SEC’s Office of Investor Education and Advocacy issued an alert on January 14, 2020, warning investors of initial exchange offerings and the potential for fraud. This follows the 2020 examination priorities the SEC released at the beginning of the year, which touched on virtual currencies and digital assets,…

On January 7, 2020, the Securities and Exchange Commission (SEC)’s Office of Compliance Inspections and Examinations (OCIE) released its 2020 examination priorities. The majority of OCIE’s priorities for the coming year involved financial regulatory issues that do not directly involve cryptocurrency – for a more detailed review of those…