SEC files its first enforcement action against alleged sponsors of initial coin offerings
04 October 2017
On September 29, 2017 the U.S. Securities and Exchange Commission (the SEC) filed a civil complaint in the U.S. District Court for the Eastern District of New York against the sponsors of two “initial coin offerings” (ICOs) for alleged violations of U.S. securities laws.1 This is the SEC’s first enforcement action against sponsors of an ICO, and it highlights the SEC’s increasing attention towards potential violations of securities laws involving this emerging technology.
Allegations and relief sought
The REcoin ICO
The Diamond Reserve Club ICO
What does this mean for ICOs, Issuers and Exchanges?
1 SEC Press Release, ‘SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds’, (September 29, 2017), available at: https://www.sec.gov/news/press-release/2017-185-0 and Securities and Exchange Commission against Recoin Group Foundation, LLC, DRC World Inc. a/k/a Diamond Reserve Club, and Maksim Zaslavskiy Complain (United States District Court Eastern District of New York), (the Complaint) available at: https://www.sec.gov/litigation/complaints/2017/comp-pr2017-185.pdf
2 SEC Press Release, ‘SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities’, (July 25, 2017) (the DAO Report), available at: https://www.sec.gov/news/press-release/2017-131
3 15Section 17(a)(1)-(3) of the Securities Act, 15 U.S.C. § 77q(a)(1)-(3); Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78j(b); Rule 10b-5(a)-(c), 17 C.F.R. § 240.10b-5(a)-(c).
4 Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a), 77e(c).
5 The Complaint, paragraphs 13, 14.
6 See the Complaint paragraphs 26-57.
7 See the Complaint paragraphs 58-88.
8 The Monetary Authority of Singapore, ‘MAS clarifies regulatory position on the offer of digital tokens in Singapore, August 1, 2017. The Canadian Securities Administration Staff Notice 46-307, “Cryptocurrency Offerings”, August 24, 2017, available at: http://www.osc.gov.on.ca/documents/en/Securities-Category4/csa_20170824_cryptocurrency-offerings.pdf; the Hong Kong Securities and Futures Commission, “Statement on initial coin offerings”, September 5, 2017, available at: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR117; The U.K Financial Conduct Authority, “Consumer Warning about the risks of Initial Coin Offerings (‘ICOs’)”, September 12, 2017, available at: https://www.fca.org.uk/news/statements/initial-coin-offerings.
9 The Ministry of Industry and Information Technology of the People’s Republic of China, Website statement, September 4, 2017, (see also Bloomberg.com, “Bitcoin Tumbles as PBOC Declares Initial Coin Offerings Illegal”, September 4, 2017, available at: https://www.bloomberg.com/news/articles/2017-09-04/china-central-bank-says-initial-coin-offerings-are-illegal ); (see also Bloomberg.com, “Cryptocurrencies Drop as South Korea Bans ICOs, Margin Trading”, September 29, 2017, available at: https://www.bloomberg.com/news/articles/2017-09-29/cryptocurrencies-drop-as-south-korea-bans-icos-margin-trading).
10 Swiss Financial Market Supervisory Authority FINMA, “FINMA is investigating ICO procedures”, September 29, 2017, available at: https://www.finma.ch/en/news/2017/09/20170929-mm-ico/; Australia Securities & Investments Commission, Initial Coin Offerings Information Sheet (INFO 225), September 28, 2017, available at: http://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings/
11 Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a), 77e(c).
12 Section D, the DAO Report. See Section 6 of the Exchange Act, 15 U.S.C. §78e; Section 3(a)(1) of the Exchange Act, 15 U.S.C. § 78c(a)(1); and Rule 3b-16, 17 C.F.R. § 240.3b-16(a).