The flurry of action surrounding initial coin offerings (ICOs) by the Securities and Exchange Commission (SEC) continued this week. According to an unsealed complaint filed in federal district court (Dallas) that was released on January 29, 2018, the SEC brought charges to halt “AriseCoin,” an allegedly fraudulent scheme to raise hundreds of millions of dollars through an ICO. This latest action by the SEC is notable because it is the first time in which the SEC sought the appointment of a receiver to oversee assets in connection with ICO fraud given the gravity of the potential financial losses to investors.
From late December 2017 through January 2018, Dallas-based AriseBank used various forms of publicity including social media and a celebrity endorsement by legendary professional boxer Evander Holyfield to raise hundreds of millions of dollars through a coin offering. “AriseCoin” cryptocurrency was issued to retail investors to fund what the co-founders publicized as the world’s first decentralized bank. The SEC alleges that AriseBank never purchased an FDIC-insured bank, a claim made by AriseBank during the offering. Moreover, AriseBank omitted important disclosures in its marketing materials regarding the criminal background of its key executives.
As a result of the SEC’s complaint, the court froze the assets of the co-founders and AriseBank and appointed a receiver to oversee the assets of AriseBank. The SEC is seeking preliminary and permanent injunctions to halt the ICO, disgorgement of gains plus interest and penalties, and bars against the co-founders to prohibit them from offering digital currencies in the future and from serving as officers and directors of public companies.
The SEC’s recent action is consistent with Chairman Clayton’s public comments warning that the SEC is on high alert with respect to ICOs that are contrary to the spirit of securities laws. Moreover, Shamoil Shipchandler, director of the SEC’s Fort Worth Regional Office, asserted that the SEC intends to take an active role to protect investors: “Attempting to conceal what we allege to be fraudulent securities offerings under the veneer of technological terms like ‘ICO’ or ‘cryptocurrency’ will not escape the Commission’s oversight or its efforts to protect investors.” We will continue to monitor the SEC’s actions throughout 2018 and any regulatory guidance provided by the SEC or other applicable regulatory agencies.