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On August 28, the SEC entered an order against a Los Angeles-based media and entertainment company charging them with conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs). According to the order, the company offered and sold different tiers of NFTs to hundreds of investors between October and December of 2021, and ultimately raised approximately $30 million from the sales. The SEC alleged that the company encouraged potential investors to purchase the unregistered NFTs in return for an investment in the business, promising “tremendous value” to the purchasers if the company was successful in its attempts to “build the next Disney” and launch other creative projects. The order found that the NFTs were ultimately investment contracts and therefore securities, and that the company subsequently violated federal securities laws by offering and selling crypto assets in an unregistered securities offering that was not otherwise exempt from registration requirements.
The SEC noted that all securities, in whatever form, are required to be registered and that when companies fail to register securities, “investors of all types are deprived of the protections afforded them by the robust disclosures and other safeguards long provided by our securities laws.” The company did not admit or deny the findings set forth in the order but agreed to cease-and-desist from violating registration provisions of the 1933 Act and pay a combined penalty of over $6.1 million in fees. The order also establishes a “Fair Fund” to return money to investors who paid to purchase NFTs.
On the same day, the SEC released a statement from Republican commissioners, Hester M. Peirce and Mark T. Uyeda, underscoring the significance of the commission’s first NFT enforcement action. “People are experimenting with a lot of different uses of NFTs,” said the commissioners in their partial dissents. “Consequently, any attempt to use this enforcement action as precedent is fraught with difficulty.” The commissioners further criticized the SEC’s failure to provide guidance on NFTs when they first started proliferating and raised several questions.
On June 30, the DOJ charged six individuals in four separate cases for allegedly playing a role in several cryptocurrency-related fraud schemes. In its press release announcing the indictments, the DOJ said these schemes include “the largest known Non-Fungible Token (NFT) scheme charged to date, a fraudulent investment fund that purportedly traded on cryptocurrency exchanges, a global Ponzi scheme involving the sale of unregistered crypto securities, and a fraudulent initial coin offering.”
- Crypto NFT Scheme: The DOJ charged a Vietnamese national with one count of conspiracy to commit wire fraud and one count of conspiracy to commit international money laundering related to his involvement in an NFT project, in which the individual and his co-conspirators allegedly engaged in a “rug pull” that ended the investment project and stole roughly $2.6 million from investors. Shortly after the rug pull, the DOJ said in its announcement that the individuals allegedly “laundered investors’ funds through ‘chain-hopping,’ a form of money laundering in which one type of coin is converted to another type and funds are moved across multiple cryptocurrency blockchains.” The individuals also allegedly used decentralized cryptocurrency swap services to hide the trail of investors’ stolen funds.
- Crypto Ponzi and Unregistered Securities Scheme: The DOJ charged two Brazilian nationals and a Florida resident with one count of conspiracy to commit wire fraud and one count of conspiracy to commit securities fraud in connection with a global cryptocurrency-based Ponzi scheme that generated approximately $100 million from investors. The Brazilian nationals were also charged with conspiracy to commit international money laundering. According to the DOJ, the individuals fraudulently promoted a cryptocurrency investment platform and unregistered securities offering by misrepresenting a purported proprietary trading bot and falsely guaranteeing returns to investors. The Brazilian nationals allegedly laundered investors’ funds through a foreign-based cryptocurrency exchange and paid earlier platform investors with money obtained from later investors, the DOJ said. The SEC also filed a lawsuit against all three individuals and their company in the U.S. District Court for the Southern District of Florida.
- Crypto Initial Coin Offering Scheme: A California resident who founded a cryptocurrency investment platform was charged by the DOJ with one count of securities fraud for his role in a cryptocurrency fraud scheme involving the platform’s initial coin offering (ICO), which raised roughly $21 million from investors globally. According to the DOJ, the individual falsified information in company white papers for prospective investors, promoted fake testimonials, and fabricated purported business relationships with the Federal Reserve Board and dozens of major companies to appear legitimate.
- Crypto Commodities Scheme: The DOJ charged the owner of a cryptocurrency investment platform with one count of conspiracy to commit wire fraud, four counts of wire fraud, one count of conspiracy to commit commodities fraud, and one count of obstruction of justice. The Nevada resident allegedly raised approximately $12 million from investors by using the platform to solicit investors’ participation in an unregistered commodity pool (“a fund that combines investors’ contributions to trade on the futures and commodity markets”), told investors that he used a trading bot that “could execute over 17,000 transactions per hour on various cryptocurrency exchanges” to earn profits, and falsely represented that this trading bot would generate between 500 to 600 percent returns on the amount invested.
“Our office is committed to protecting investors from sophisticated scammers seeking to capitalize on the relative novelty of digital currency,” U.S. Attorney Juan Antonio Gonzalez for the Southern District of Florida stated. “As with any emerging technology, those who invest in cryptocurrency must beware of profit-making opportunities that appear too good to be true.”