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Financial Services Law Insights and Observations

SEC charges participants of two allegedly fraudulent ICOs

Securities SEC Enforcement Initial Coin Offerings

Securities

On September 11, the SEC announced charges against five Atlanta-based individuals for allegedly promoting unregistered and fraudulent initial coin offerings (ICOs) owned by one of the defendants, a film producer, who promised investors he would build a digital streaming platform and a digital-asset trading platform. Two companies controlled by the film producer that conducted the ICOs were also charged. According to the SEC’s complaint, the film producer, among other things, allegedly misappropriated the funds raised in the ICOs, transferred and sold certain tokens to generate an additional $2.2 million in profits, and engaged in manipulative trading to artificially inflate the price of other tokens. The SEC charged the film producer with violating the registration, antifraud, and anti-manipulation provisions of the federal securities laws. The other defendants were charged with various securities violations, including violating registration, antifraud, and anti-touting provisions for their roles in promoting, offering, selling, or conducting the ICOs. The complaint seeks injunctive relief, disgorgement, and civil monetary penalties, as well as an officer-and-director bar against the film producer and certain prohibitions against the other defendants.

The SEC’s press release noted that it had entered into proposed settlements subject to court approval with several of the defendants except for the film producer, which would require three of the defendants to each pay a $25,000 penalty and subject them to “conduct-based injunctions prohibiting them from participating in the issuance, purchase, offer, or sale of any digital asset security for a period of five years.” An order reached with another defendant—who neither admitted nor denied the findings—imposes a $75,000 civil monetary penalty and bans the defendant from participating in the offering or sale of digital-asset securities for at least five years.

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