On January 30, 2018, the U.S. Securities and Exchange Commission (SEC) announced[1] that it had obtained an order from a U.S. District Court in Dallas, Texas, halting an allegedly fraudulent initial coin offering scheme.  The SEC’s complaint alleges that defendants AriseBank and AriseBank founders Jared Rice Sr. and Stanley Ford violated the anti-fraud and registration provisions of the U.S. federal securities laws, including by falsely claiming that AriseBank’s customers’ accounts and transactions were FDIC insured, falsely claiming that AriseBank’s customers could spend 700 different virtual currencies using AriseBank’s Visa card, and failing to disclose the criminal history of two of AriseBank’s officers.  Among other relief, the district court has granted the SEC’s request to freeze the defendants’ assets, and for the first time in a cryptocurrency enforcement case has appointed a receiver over those assets, including the cryptocurrencies purportedly held by AriseBank. Continue Reading SEC Freezes Allegedly Fraudulent “Decentralized Bank” ICO

On Monday, December 11, 2017, SEC Chairman Jay Clayton waded into the ongoing debate surrounding cryptocurrencies, initial coin offerings, and the regulation of both.  In a statement urging potential investors to exercise caution and market professionals to focus on their responsibility to help protect investors, the Chairman warned of the susceptibility of the burgeoning crypto markets to manipulation and fraud. Continue Reading SEC Chairman Offers Views on Initial Coin Offerings

The SEC has recently signaled an increased concern with the offerings and marketing of Initial Coin Offerings (“ICOs”),[1] 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. Continue Reading The SEC Warns That Celebrity Endorsements of Virtual Currency May Violate Federal Securities Laws

On Monday, December 4, 2017, the U.S. Securities and Exchange Commission (SEC) obtained an emergency order from a U.S. District Court in New York to enjoin an allegedly fraudulent initial coin offering scheme.  The SEC’s complaint alleges that Dominic Lacroix, a recidivist securities law violator, and his company PlexCorps violated the anti-fraud and registration provisions of the U.S. federal securities laws in collecting up to $15 million in investor funds purportedly in exchange for digital tokens and promised returns in excess of 1,000% in 29 days.  The complaint also charges Lacroix’s partner Sabrina Paradis-Royer with securities fraud.  Among other relief, the district court has granted the SEC’s request to freeze the defendants’ assets.

Continue Reading Newly Created SEC Cyber Unit Takes First Action Against Allegedly Fraudulent ICO

The Securities Exchange Commission (“SEC”), Office of Compliance Inspections and Examinations (the “OCIE”), published a Risk Alert describing its findings from its second cybersecurity survey of regulated entities (the “Cybersecurity 2 Initiative”).

The survey covered 75 registered broker-dealers, investment advisers, and investment companies and built upon OCIE’s prior round of cybersecurity examinations in 2014 (the “Cybersecurity 1 Initiative”).

While OCIE found improvements in cybersecurity preparedness since the Cybersecurity 1 Initiative, it also identified areas for improvement. Among other things, OCIE concluded that it is not sufficient for firms to simply establish written cybersecurity policies and procedures—such policies must also be maintained, sensibly enforced, and capable of addressing cybersecurity deficiencies as they arise.

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