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  • Issuer pays $5 million penalty for unregistered digital offering

    Securities

    On October 21, the SEC announced the U.S. District Court for the Southern District of New York entered a final judgment against a tech company issuer that raised approximately $100 million through an unregistered initial coin offering. As previously covered by InfoBytes, the SEC filed an action alleging the issuer failed to provide required disclosures to investors and did not register the offer or sale of its digital tokens with the SEC, as required by Section 5 of the Securities Act of 1933 (the Act). The SEC argued that the issuer marketed the digital tokens as an investment opportunity and told investors that they could earn future profits from the issuer’s efforts to create, develop, and support a digital “ecosystem.” 

    The court granted summary judgment in favor of the SEC at the end of September, concluding, among other things, that the issuer violated Section 5 of the Act when it conducted an unregistered offering of securities that did not qualify for any exemption from registration requirements. The final judgment (i) requires the issuer to pay $5 million in a civil penalty; (ii) permanently enjoins the issuer from violating Section 5 of the Act; and (iii) requires the issuer, for a period of three years, to provide notice to the SEC before engaging in any “issuance, offer, sale or transfer” of specified assets.

    Securities SEC Initial Coin Offerings Virtual Currency Enforcement Courts

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  • SEC charges participants of two allegedly fraudulent ICOs

    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.

    Securities SEC Enforcement Initial Coin Offerings

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  • SEC issues $18.5 million civil penalty for unregistered digital token offering

    Securities

    On June 26, the SEC announced a settlement with two offshore entities, resolving allegations that the entities violated federal securities laws by raising more than $1.7 billion in unregistered digital token offerings. As previously covered by InfoBytes, in October 2019, the SEC obtained a temporary restraining order, halting the offerings. According to the SEC, the entities violated Sections 5(a) and 5(c) of the Securities Act by failing to register its offers and sales of securities with the SEC. Prior to the restraining order, the entities had sold approximately 2.9 million digital tokens worldwide, including more than 1 billion tokens to 39 U.S. purchasers. The settlement requires the entities to return more than $1.2 billion to investors in “ill-gotten gains” from the token offerings. Additionally, the parent company is required to pay an $18.5 million civil penalty and give proactive notice to the SEC before participating in any digital asset issuances for the next three years. The entities entered into the settlement without admitting or denying the allegations in the SEC’s complaint.

    Securities SEC Initial Coin Offerings Blockchain Virtual Currency

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  • SEC settles with blockchain company over unregistered ICO

    Securities

    On May 28, the SEC announced a settlement with a California-based blockchain services company resolving allegations that the company conducted an unregistered initial coin offering (ICO) of digital asset securities. According to the order, the company raised over $25 million by selling “Consumer Activity Tokens” to nearly 9,500 investors, including U.S. investors, to raise capital to “develop, administer, and market a blockchain-based search platform for targeted consumer advertising.” The company allegedly told investors that the tokens would increase in value and made the tokens available on third-party digital asset trading platforms after the ICO. However, the SEC found that the tokens constituted securities, and that the company allegedly violated Sections 5(a) and 5(c) of the Securities Act by distributing the tokens without having the required registration filed or in effect, nor did it qualify for an exemption to the registration requirements.

    The order, which the company consented to without admitting or denying the findings, imposes a $400,000 penalty, and requires the company to disgorge $25.5 million and pay approximately $3.4 million in prejudgment interest. Additionally, the company is required to surrender all its remaining tokens to the fund administrator so they can be permanently disabled, publish notice of the order, and request the removal of the distributed tokens from all digital asset trading platforms.

    Securities SEC Enforcement Initial Coin Offerings Securities Exchange Act

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  • SEC settles with blockchain company over unregistered ICO

    Securities

    On February 19, the SEC announced a settlement with a blockchain technology company resolving allegations that the company conducted an unregistered initial coin offering (ICO). According to the order, the company raised approximately $45 million from sales of its digital tokens to raise capital to develop a digital asset trade-testing platform and to build a cryptocurrency-related data marketplace. The SEC alleges that the company violated Section 5(a) and 5(c) of the Securities Act because the digital assets it sold were securities under federal securities laws, and the company did not have the required registration statement filed or in effect, nor did it qualify for an exemption to the registration requirements. The order, which the company consented to without admitting or denying the findings, imposes a $500,000 penalty and requires the company to register its tokens as securities, refund harmed investors through a claims process, and file timely reports with the SEC.

    Securities SEC Initial Coin Offerings Settlement Securities Exchange Act Blockchain Cryptocurrency

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  • SEC suit alleges fraudulent ICO

    Securities

    On January 21, the SEC announced that it filed suit in the U.S. District Court for the Eastern District of New York against a blockchain company and the company’s founder (defendants) for allegedly “conducting a fraudulent and unregistered initial coin offering (ICO).” The SEC alleges, among other things, that from 2017 until 2018, the defendants raised $600,000 from nearly 200 investors through promoting an ICO of digital asset securities called “OPP Tokens,” using material misrepresentations to create the false impression that the defendants’ platform was creating notable growth in the company. The defendants marketed the tokens by making misstatements to potential investors, greatly exaggerating the numbers of providers that were “willing to do business on, and contribute content to, [defendants’] blockchain-based platform.” The complaint also alleges that in marketing the ICO, the defendants provided a catalog of small businesses eligible to use the defendants’ platform that numbered in the millions, in order to create the false impression that the platform had a huge base of users. In reality, the catalog was not compiled by the defendants, but was simply acquired from a vendor. Additionally, the SEC alleges that the defendants provided numerous customer reviews in its promotions to create the impression that the platform had many users creating content, which were actually reviews stolen from a third-party website. The SEC charges that in addition to the above allegations, the defendants misrepresented that they had filed an SEC registration statement for the ICO. The SEC seeks injunctive relief, disgorgement of profits, civil money penalties, and a permanent bar preventing the founder from serving as officer or director of any public company.

    Securities SEC Initial Coin Offerings Blockchain Fraud Advertisement Fintech

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  • SEC obtains temporary injunction against unregistered digital token offering

    Securities

    On October 11, the SEC announced it obtained a temporary restraining order through an emergency action filed against two offshore entities that allegedly raised more than $1.7 billion of investor funds. According to the complaint, the entities sold approximately 2.9 million digital tokens worldwide, including more than 1 billion tokens to 39 U.S. purchasers. The entities promised that the tokens would be delivered upon the launch of its own blockchain by the end of October 2019. The SEC alleges the entities violated Sections 5(a) and 5(c) of the Securities Act by failing to register its offers and sales of securities with the SEC. In addition to the emergency relief, the SEC is seeking a permanent injunction, disgorgement, and civil penalties against the offshore entities.

    Securities SEC Initial Coin Offerings Blockchain Virtual Currency

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  • SEC settles with blockchain company for $24 million over unregistered ICO

    Securities

    On September 30, the SEC announced a settlement with a blockchain technology company resolving allegations that the company conducted an unregistered initial coin offering (ICO). According to the order, the company raised several billion dollars from the general public after an ICO, in which it publicly offered and sold 900 million digital assets in exchange for virtual currency, to raise capital to develop software. The SEC alleges that the company violated Section 5(a) and 5(c) of the Securities Act because the digital assets it sold were securities under federal securities laws, and the company did not have the required registration statement filed or in effect, nor did it qualify for an exemption to the registration requirements. The order, which the company consented to without admitting nor denying the findings, imposes a $24 million civil money penalty.

    Securities SEC Initial Coin Offerings Virtual Currency

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  • SEC charges digital platform for unregistered ICO

    Securities

    On September 18, the SEC announced it filed a lawsuit in the U.S. District Court for the Central District of California against a digital platform and its owner (collectively, “defendants”) for raising over $14 million in an unregistered initial coin offering (ICO) in violation of Section 5 of the Securities Act of 1933 and for acting as unregistered brokers for other digital asset offerings in violation of Section 15 of the Securities Exchange Act of 1934. The SEC contends the defendants claimed to investors that their tokens would increase in value upon trading and that ICO token holders would be able to swap them for other tokens on the platform, at an average of a 75 percent discount. The SEC notes that the tokens had experienced “a precipitous loss in value” since issuance, averaging roughly 1/20th of the average purchase price during the offering. Moreover, the SEC alleges the defendants acted as a broker for other ICOs, raising over $650 million for their clients. The SEC’s suit seeks a permanent injunction, disgorgement of profits plus interest, and civil penalties.

    Securities SEC Initial Coin Offerings Virtual Currency

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  • SEC charges issuer with conducting sale of unregistered digital tokens

    Securities

    On June 4, the SEC announced it had filed a lawsuit in the U.S. District Court for the Southern District of New York against a tech company issuer for allegedly raising approximately $100 million through an unregistered initial coin offering. According to the complaint, the issuer failed to provide required disclosures to investors and did not register the offer or sale of its digital tokens with the SEC, as required by Section 5 of the Securities Act of 1933. The SEC contends that the issuer marketed the digital tokens as an investment opportunity and told investors that they could earn future profits from the issuer’s efforts to create, develop, and support a digital “ecosystem.” According to the SEC, “[f]uture profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.” The SEC’s suit seeks a permanent injunction, disgorgement of profits plus interest, and a civil penalty.

    Securities Initial Coin Offerings Virtual Currency SEC

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