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The organizers of an initial coin offering (ICO) recently won dismissal of an investor’s fraud claims by establishing that their public risk disclosures negated the investor’s claims of reliance on alleged misstatements.  The project, a video service provider’s ICO, was governed by a purchase agreement called a “Simple Agreement for Future Tokens” (“SAFT”).   The plaintiff investor later lost his entire investment as the token collapsed, allegedly due to the provider’s decision to scrap its initial plans for a decentralized platform and move to a permissioned blockchain (and also the provider’s choice to seek additional capital via a “Regulation A” public offering).  The New York court found that even if certain representations made by the issuer regarding the prospect of a decentralized network were actionable, the Plaintiff had not plausibly alleged  “reasonable reliance” on such representations in signing the SAFT. (Rostami v. Open Props, Inc., No. 22-03326 (S.D.N.Y. Jan. 9, 2023)).

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.

In a notable ruling, a Massachusetts district court declined to dismiss a complaint filed by the Commodity Future Trading Commission (“CFTC”) against an entity over an alleged fraudulent virtual currency offering, ruling that cryptocurrencies fall under the definition of “commodity” under the Commodity Exchange Act (“CEA”) and therefore may be duly regulated by the CFTC. (CFTC v. My Big Coin Pay, Inc., No. 18-10077 (D. Mass. Sept. 26, 2018)). Given that the CFTC has stated its intention to actively police the virtual currency markets, this decision is important in reinforcing the CFTC’s legal authority and jurisdiction over cryptocurrency offerings. Moreover, given that earlier this year a New York district court affirmed the CFTC’s jurisdiction over virtual currencies, this latest ruling is additional precedent in this regulatory area.

In January 2018, the CFTC brought suit against the defendant My Big Coin Pay, Inc. (“My Big Coin”), creator of the My Big Coin virtual currency (“MBC”), alleging that it was engaged in a fraudulent “virtual currency scheme” in violation of the CEA and a CFTC implementing regulation banning fraud or manipulation in connection with the sale of a commodity (17 C.F.R. §180.1(a)). Specifically, the CFTC alleged that the defendants fraudulently solicited customers by making false claims about MBC’s value, usage and trade status, and false statements that the virtual currency was backed by gold. The defendants also told investors that MBC was being “actively traded” on several currency exchanges, but, according to the CFTC, My Big Coin made up and arbitrarily changed the price of the MBC virtual currency to mimic the fluctuations of a legitimate, actively-traded virtual currency. As asserted by the CFTC, the defendants allegedly misappropriated over $6 million from customers for personal gain. The court previously issued a restraining order freezing the defendants’ assets.

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.