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SEC says digital asset trading company violated the Exchange Act
On September 13, the SEC announced charges against three media companies (respondents) for allegedly violating the Securities Act of 1933 (Securities Act) by conducting an illegal unregistered offering of stock and coin security. In addition, two of the companies were also charged for allegedly conducting an illegal unregistered offering of a digital asset security. According to the SEC’s order, between April and June 2020, the respondents generally solicited thousands of individuals to invest in a common stock offering. During the same time period, two of the companies solicited individuals to invest in their offering of a digital asset coin security. As a result of these two unregistered securities offerings, whose proceeds were commingled, the respondents collectively raised approximately $487 million from over 5,000 investors.
The order finds that, through both the stock and coin offering, the respondents violated Sections 5(a) and 5(c) of the Securities Act by offering and selling securities without having properly registered. The order, to which the companies consented without admitting or denying the findings, notes that the respondents are banned from participating in any offering of a digital asset security, and are required to cease and desist from future violations of the Securities Act and assist the SEC staff in the administration of a distribution plan, among other things. Two of the companies agreed to pay, jointly and severally, disgorgement of approximately $434 million plus prejudgment interest of approximately $16 million, in addition to a civil penalty of $15 million each. The other company agreed to pay disgorgement of approximately $52 million plus prejudgment interest of almost $2 million, as well as a civil penalty of $5 million. The order also establishes a Fair Fund to return monies to injured investors.
SEC settles with company over data breach
On August 16, the SEC announced charges against a London-based educational publishing company for its role in allegedly misleading investors regarding a cyber breach that involved millions of student records and had inadequate disclosure controls and procedures in place. According to the SEC’s order, the company made material misstatements and omissions about a 2018 cyber intrusion that affected millions of rows of data across 13,000 school, district, and university customer accounts in the U.S. According to a 2019 report furnished to the Commission, the company’s risk factor disclosure implied that the company faced the hypothetical risk that a “data privacy incident” “could result in a major data privacy or confidentiality breach” but did not disclose that a data breach involving the company had previously taken place. In response to an inquiry by a media outlet, the company sent a breach notification to its affected customers and issued a previously prepared statement that included misstatements regarding the breach and data involved. The order found that the company failed “to maintain disclosure controls and procedures designed to analyze or assess such incidents for potential disclosure in the company’s filings.” The SEC charged the company with violating, among other things, Rule 13a-15(a) of the Securities Act, which requires every issuer to maintain disclosure controls and procedures, and Section 13(a) of the Exchange Act which requires “every foreign issuer of a security registered pursuant to Section 12 of the Exchange Act to furnish the Commission with periodic reports containing information that is accurate and not misleading.” The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $1 million and provides that the company must cease and desist from committing or causing any future violations of the Securities Act and the Exchange Act.
SEC takes emergency action against investor fraud scheme
On August 13, the SEC announced it obtained a temporary restraining order through an emergency action filed against an individual and his two entities, which allegedly induced dozens of consumers to invest by falsely claiming that their funds would be used to acquire real estate and to make commercial loans. According to the SEC, the individual misappropriated the vast majority of the investors' funds to pay for his residences, cover credit cards bills, and make student loan payments. The complaint also alleges that the individual hid the fraud from investors by providing investors with false valuations, among other things. The SEC’s complaint alleges violations of the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and seeks a permanent injunction against the defendants enjoining them from future violations, disgorgement of all ill-gotten gains, and civil penalties, among other things.
SEC settles with company over misrepresentation of ICO
On July 14, the SEC announced a settlement with the owners and operators of a software platform provider, resolving allegations that the company violated anti-touting provisions by failing to disclose the compensation it received from issuers of the digital asset securities it profiled. According to the order, the company’s website, which was accessible in the U.S. from 2016 to August 2019, publicized offerings for digital tokens. The platform claimed to “list” or profile the “best” token offerings, such as so-called initial coin offerings (ICOs) and initial exchange offerings. The company also allegedly claimed that its “mission [was] to make it easy and safe for people around the world to join ICOs.” According to the order, the platform profiled more than 2,500 different token offerings, which compromised fundraising of over $10 billion. The SEC alleged that the company violated provisions of the Securities Act, such as Section 2(a), because the digital tokens publicized by the company included those that were offered and sold as investment contracts, and 17(b), because the company promoted a security without disclosing that they received compensation for doing so. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $154,434 and $43,000 in disgorgement, and provides that the company must cease and desist from committing or causing any future violations of the anti-touting provisions of the federal securities laws. SEC Commissioners Hester M. Peirce and Elad L. Roisman dissented from the settlement, stating they agreed that “touting securities without disclosing the fact that you are getting paid, and how much, violates Section 17(b)” but “[they] are disappointed that the Commission’s settlement with [the company] did not explain which digital assets touted by [the company] were securities[.]”
SEC settles with blockchain company over unregistered ICO
On June 22, the SEC announced a settlement with an intellectual property search software platform provider and its CEO resolving allegations that the company made materially false and misleading statements in connection with an unregistered initial coin offering (ICO) of digital asset securities. According to the order, the company raised $7.6 million from investors by offering and selling digital tokens. In promoting the ICO, the company and its CEO made multiple materially false statements to investors and potential investors, including false statements about the company’s revenues, number of employees, and the platform’s user base. The SEC alleges that the company violated Section 5(a) and 5(c) of the Securities Act because the digital assets it offered and 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 from registration. The order, which the company consented to without admitting or denying the findings, imposes a $7.6 million penalty, and requires the company to “destroy all [of the digital tokens] in their possession or control,” publish notice of the order on the company’s social media accounts, request removal of the tokens from trading platforms, and refrain from participating in future offerings of a digital asset security.
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