By: Michael Psathas
Initial coin offerings, or “ICOs”, have exploded in 2017 and in some cases have led to significant financial returns for speculative investors in the nascent industry. Companies from across the world have raised more than $1.6 billion this year according to CB Insights. However, it has been a challenging month for investors and other stakeholders expecting a laissez-faire regulatory environment both in the United States and abroad.
On September 29, 2017, the U.S. Securities and Exchange Commission (SEC) charged Maksim Zaslavskiy and two of his companies, REcoin Group Foundation and DRC World, with selling unregistered securities and defrauding investors in what appears to be a pair of fraudulent ICO schemes. This is a significant milestone given that it is the first time that the SEC sought charges against an individual or company related to a coin offering campaign. The complaint seeks disgorgement plus interest and penalties, as well as a permanent injunction. The SEC is also seeking an officer and director bar and a bar from participating in future offerings of digital securities for Zaslavskiy. Importantly, the SEC was able to obtain an emergency court order to freeze all assets of Zaslavskiy and his companies.
A few days prior to the action filed against Zaslavskiy, the SEC announced the creation of a new Cyber Unit that will focus on cyber related misconduct, including misconduct related to ICOs and distributed ledger technology. The SEC’s announcement was the first tangible action related to the ICO industry since the release of its Investigative Report in July of this year.
Until the recent actions against Zaslavskiy and the creation of a new Cyber Unit, the SEC had demonstrated restraint with respect to regulating this emerging industry. Comments from SEC Chairman Jay Clayton in several recent appearances at public forums and before Congress have made clear that one of the key priorities will be to protect retail investors and that the SEC sees fraud in the ICO market as a threat to such investors. On October 4, 2017, in an appearance before the House Financial Services Committee, Chairman Clayton voiced his concerns about the industry:
I’m actually cautiously optimistic about the division’s enforcement of this. They know this is a ripe area for pump and dump. Pump and dump – it’s actually easier here than it is in the penny stock area because it’s all electronic, it’s all anonymous [and] and it’s harder to catch the bad guys at the end of the day.
Foreign governments are taking an even more aggressive approach than the SEC by banning all coin offerings due to concerns relating to fraud, money laundering and other financial scams. On September 4, 2017, seven Chinese government agencies, including the People’s Bank of China, issued a joint statement providing for a comprehensive and immediate ban on all ICOs. In fact, China issued a strong warning for those caught participating in future coin offerings. More recently, in the last week of September, South Korea became the second major economy to ban domestic companies from participating in ICOs due to the potential for financial scams. Finally, the European Union will likely see a new regulatory framework in the near future. In early October, Ewald Nowtny, one of the members of the European Central Bank, stated that they were discussing “concrete legal restrictions” for the industry.
If you have questions or would like additional information, please contact Michael Psathas (psathasm@whiteandwilliams.com; 212.868.4833) or another member of our Corporate and Securities Group.
