The SEC has recently signaled an increased concern with the offerings and marketing of Initial Coin Offerings (“ICOs”), which should be of interest to companies and institutions involved with ICOs. On November 1, 2017, the SEC Division of Enforcement and Office of Compliance Inspections and Examinations (“OCIE”) jointly issued a public statement warning celebrities and other influencers promoting Initial Coin Offerings (“ICOs”) about potential violations of a host of federal securities laws, including the anti-touting and anti-fraud provisions of the federal securities laws. Specifically, the public statement noted that endorsements may be unlawful if they do not “disclose the nature, source, and amount of any compensation paid, directly or indirectly . . . in exchange for the endorsement.,” and that endorsers may also face liability for potential violations of the anti-fraud provisions, for participation in an unregistered securities offering, and for acting as unregistered brokers. The public statement also noted that investment decisions should not be based solely on an endorsement and cautioned that “celebrity endorsement may appear unbiased, but instead be part of a paid promotion.” The public statement follows an investigative report issued by the Division of Enforcement on July 25, 2017, which announced that blockchain technology-based coins or tokens sold in an ICO may be a form of security under the Securities Act of 1933 and the Securities Exchange Act of 1934.
The SEC’s announcement follows recent endorsements of such ICOs by celebrities such as Floyd Mayweather, DJ Khaled, Paris Hilton and Jamie Foxx, who each used their social media platforms to promote ICOs in the past months. According to an article published by The New York Times five days before the SEC’s public announcement, celebrity endorsements have helped raise $3.2 billion in ICOs this year, which is a 3,000 percent increase over the total amount raised in ICOs last year.
In its statement, the SEC said it “will continue to focus on these types of promotions to protect investors and to ensure compliance with the securities laws.” Additionally, the SEC Office of Investor Education and Advocacy posted an Investor Alert on their website the same day cautioning against investment decisions based on endorsements from celebrities and encouraging investors to report any possible securities fraud to the SEC. These recent pronouncements indicate a dovetailing of recent areas of focus for the SEC’s enforcement program—new technologies that expand the scope and ease of securities offerings with increased efforts to focus enforcement resources on areas having the potential to harm retail investors.
Following the SEC’s public statement and Investor Alert signaling increased attention on ICOs, the SEC announced that it had filed charges against PlexCorps and two of its principals based on an alleged ICO fraud. PlexCorps had raised up to $15 million in an ICO this year by promising a 13-fold profit in less than one month. The company has been charged with violating anti-fraud provisions and the registration provision of the federal securities laws. These charges are the first filed by the SEC’s Cyber Unit, which was created in September 2017. Robert Cohen, the Chief of the Cyber Unit, stated “[t]his first Cyber Unit case hits all the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing.” To read more about this case, please see our previous article.
 ICOs are fundraising mechanisms, similar to crowdfunding, in which companies create and sell new virtual currency, in the form of blockchain-based coins or tokens.