Our colleague Ernest Badway writes about a recent decision in a federal criminal case rejecting the defendant’s argument that there was no securities fraud because he was selling digital tokens. The case involved charges that the defendant had defrauded investors in an initial coin offering. Ernie writes that “[o]ne of the big takeaways from this case is that courts, at least, initially, seem to be reluctant to claim crypto instruments are not securities. It almost appears that, like everyone else, courts such as the one in the EDNY are looking for more guidance, and are reluctant to make any major pronouncements about the status of such items as digital tokens.” You can read Ernie’s article, which is posted to the Securities Compliance Sentinel blog, here.

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The Wall Street Journal reports today that the Securities and Exchange Commission has recently issued multiple subpoenas and requests for information in a widening investigation of cryptocurrency firms.

According to the article, the subpoenas seek information about the structure for token sales and initial coin offerings:

The SEC scrutiny is focused in part on “simple agreements for future tokens,” or SAFTs, which are used in some of the most prominent crypto-fundraisings, according to people familiar with the matter.

The agreements allow big investors and relativity well-off individuals to buy rights to tokens ahead of their sale.  The rights can be traded, or flipped for profits, even before the sale begins.

The SEC is concerned that such agreements are potentially being used to trade like securities without conforming to the strict rules that apply to securities.

The SEC’s latest actions follow its creation last fall of a dedicated Cyber Unit to focus the Enforcement Division’s cyber-related expertise on misconduct involving distributed ledger technology and initial coin offerings, the spread of false information through electronic and social media, hacking, and threats to trading platforms.  In December, the SEC’s Cyber Unit filed its first-ever charges, obtaining an emergency asset freeze to halt a “fast-moving” ICO fraud that raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month.  Several days later, the SEC announced that a California-based company selling digital tokens to investors to raise capital for its blockchain-based food review service halted its initial coin offering (ICO) and agreed to a cease-and-desist order in which the SEC found that its conduct constituted unregistered securities offers and sales.  Then in late January, the SEC announced that it has obtained a court order halting an allegedly fraudulent ICO that targeted retail investors to fund what was claimed to be the world’s first “decentralized bank” offering its own cryptocurrency.  In addition to these enforcement actions, the SEC’s Office of Investor Education and Advocacy has issued an Investor Alert warning investors about potential scams and frauds involving ICOs.

The Wall Street Journal article reports that Robert Cohen, head of the SEC’s Cyber Unit, said last week that at least one dozen companies have placed their ICOs on hold after the SEC raised questions.  The article further reports that coin offerings have already raised about $1.66 billion this year.  According to a forthcoming study of the ICO market by MIT, approximately $270 million to $317 million of the funds raised by ICOs have “likely going to fraud or scams.”

The Wall Street Journal article is available here (subscription required).

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