In bigger crackdown of crypto abuses, SEC goes after unregistered coin offerings

Home Finance In bigger crackdown of crypto abuses, SEC goes after unregistered coin offerings
In bigger crackdown of crypto abuses, SEC goes after unregistered coin offerings

The Securities and Exchange Commission announced its first civil penalties on Friday against crypto founders who failed to register new coin offerings, part of a bigger regulatory and legal crackdown aimed at abuses and outright fraud in the growing digital currency industry.

The SEC said it settled separate cases with start-ups companies Airfox and Paragon, which raised more than $10 million each in initial coin offerings that weren’t registered. They have agreed to pay penalties, register their tokens as securities, file periodic reports with the agency and return funds to any harmed investors, according to the SEC.

The settlement comes a week after the agency notched another “first,” setting charges that a crypto firm called EtherDelta was operating as an unregistered exchange.

The cases underscore the SEC’s insistence that the relatively new digital financial products must follow traditional securities rules.

“We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities,” Stephanie Avakian, the SEC’s co-director of enforcement, said in a statement. “These cases tell those who are considering taking similar actions that we continue to be on the lookout for violations of the federal securities laws with respect to digital assets.”

On Thursday, federal prosecutors in New York announced a guilty plea by a man who defrauded investors with two cryptocurrencies he founded during the initial coin offering boom.

Maksim Zaslavkiy, pleaded guilty to conspiracy to commit securities fraud after raising money for two virtual currencies known as “REcoin” and “Diamond.” Zaslavskiy admitted to tricking investors into buying the digital tokens by claiming they were backed by real estate and diamonds.

In reality, the certificates he sent to investors were not backed by blockchain technology. Zaslavskiy also had none of the promised jewels or land to back those investments, according a statement from the Department of Justice.

Thirty nine-year-old Zaslavkiy tried earlier this year to dismiss the case against him by arguing that cryptocurrencies he created were not securities for the purpose of criminal law. That was shot down by a judge in Brooklyn in September.

A key part of Zaslavkiy’s argument at the time was that current laws around crypto are “unconstitutionally vague.” U.S. district judge Raymond Dearie disagreed. The judge stopped short of defining RECoin and Diamond as securities, but Dearie did say the jury should be able to assess them using existing laws.

“The calculated lies of Zaslavskiy and others led unsuspecting investors who thought they were purchasing cryptocurrency securities to buy worthless certificates,” United States Attorney for the Eastern District of New York, Richard P. Donoghue said in a statement. “This Office will continue to aggressively prosecute those who exploit and defraud investors, whether through traditional means of securities fraud, or new forms – such as the use of purported cryptocurrency offerings and blockchain technology.”

In an ICO, coins or tokens are sold as a form of crowdfunding. Instead of voting rights or dividends that come with shares of a company, cryptocurrencies often promise access to a network, platform or service. But they’re often backed by an abstract idea or nothing at all. That process has facilitated the rise of joke-cryptocurrencies like Dogecoin, a Shiba Inu dog meme-turned-cryptocurrency that has a passionate following on Twitter and Reddit.

ICO fundraising brought in billions from retail investors last year. In 2018 alone, companies have raised at least $9 billion through initial coin offerings, according to estimates from Autonomous Next. Many of those projects are backed by the promise of a future product or technology platform, while some are backed by nothing at all.

In June, SEC Chairman Jay Clayton made it clear that the agency won’t be updating the rules when it comes to defining this new digital asset class. As of Tuesday, bitcoin and ether are the only cryptocurrencies the SEC has explicitly said are exempt from Securities law.

Clayton has also said that all other initial coin offerings constitute securities and “if it’s a security, we’re regulating it.”

“We are not going to do any violence to the traditional definition of a security that has worked for a long time,” Clayton told CNBC earlier this year. “We’ve been doing this a long time, there’s no need to change the definition.”