Posted on 12/07/2017 at 12:00 AM by Laura Wasson
For months, the investment community has been speculating about whether Initial Coin Offerings (“ICOs”) are subject to securities laws. DMTH weighed the consequences of a decision either way in a blog last month, following unscripted remarks by SEC Chairman Jay Clayton that suggested regulation of ICOs may be coming. Almost one-month later, to the day, we have our answer: the SEC claims jurisdiction over ICOs.
How do we know?
The SEC’s new Cyber Unit obtained an emergency asset freeze on December 4, 2017, to halt a “fast-moving” ICO fraud that already raised over $15 million from thousands of investors. In relation to the freeze, the SEC filed a complaint against Dominic Lacroix, a repeat offender of securities laws from Quebec, and his company, PlexCorps. The complaint alleges that Lacroix marketed and sold “PlexCoins” to investors over the internet, promising investors they would earn a 1,354% profit in less than 29 days. According to Robert Cohen, Chief of the Cyber Unit, “This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing.”
What does this mean?
The SEC’s complaint against Lacroix, PlexCorps, and LaCroix’s partner, Sabrina Paradis-Royer, alleges the group violated anti-fraud laws and Lacroix and PlexCorps violated registration laws. These charges indicate that (1) ICOs will have to be registered under the Securities and Exchange Act of 1933 unless an exemption exists, and (2) investors will be able to recover against the issuers of new coins for misrepresentations made in any offering documents. As state Blue Sky laws typically parallel federal securities laws, ICOs may begin to be regulated by state securities divisions, as well.
How might this affect new cryptocurrencies?
Time will tell, but the SEC’s regulation of ICOs will make the process of offering new cryptocurrencies more time consuming and more expensive. This may deflate their popularity. On the other hand, SEC regulation will likely make ICOs safer for Main Street investors, increasing confidence and thereby investment in these new schemes.
Has there been any market reaction?
So far, the market’s reaction to this news has defied predictions. Last month, for example, the mere suggestion of SEC regulation by Chairman Clayton caused the price of Bitcoin to plummet 20%. Yet Bitcoin’s price continues to increase this week, despite the publication of the exact news that caused its decline last month. DMTH will continue to monitor the situation to assist investing clients.
For any questions regarding cryptocurrencies, ICOs, or SEC regulations please contact Laura Wasson.
The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.
- Laura Wasson