In recent months, the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) have issued warnings to those involved in cryptocurrencies, initial coin offerings, and token generation events. Following the lead of the federal regulators, the state securities regulators have halted certain offerings of cryptocurrency and initial coin offerings citing fraudulent activity as chief among their concerns.
On January 24, 2018, the Texas State Securities Board (the “TSSB”) prevented a “global cryptocurrency” from being offered to Texas residents in what the TSSB considered to be an offering of unregistered securities. Note that R2B Coin was a resident of Hong Kong, and its manager was an entity domiciled in Hong Kong and Dubai. R2B Coin promoters claimed that their coin would become one of the leading, most stable and most usable cryptocurrencies in the world. The Texas residents were solicited by being invited to participate in the USA Conference Calls and through the defendants’ website. The TSSB found that the R2B Coins were not registered or qualified in Texas and the defendant was not registered as a dealer with the SEC. Further, the TSSB found that the defendant engaged in fraud in connection with the offer and made misleading and deceptive statements. It is interesting to note that there is no direct connection between Texas and the defendants, other than the website offering accessible by everyone and the invitation to join one of the USA Conference Calls.
On February 9, 2018, the Attorney General for the State of New Jersey issued a cease and desist order against BitsTrade, an investment pool guaranteeing profits. The Attorney General found that the investment in the investment pool was a security and that BitsTrade failed to register itself as a broker-dealer under the New Jersey Uniform Securities Laws. Again, BitsTrade had no connection to New Jersey, other than the fact that BitsTrade had a website accessible by anyone. It is unclear whether any New Jersey residents invested into BitsTrade. Regardless of the connection, the NJ Attorney General concluded that the BitsTrade Investment was an unregistered security; BitsTrade was not registered in NJ as a broker-dealer; and it engaged in fraud by omitting to provide all of the material information regarding the company and the offering to the prospective investors.
Finally, a class action lawsuit was brought to the U.S. District Court of the Middle District of Florida against BitConnect, the crypto-lending and exchange platform that recently shut down as a result of what many believe to be a failed ponzi scheme. This lawsuit makes it BitConnect’s fifth class-action lawsuit in the U.S and the third in the State of Florida.
On January 24, 2018, the Texas State Securities Board (the “TSSB”) prevented a “global cryptocurrency” from being offered to Texas residents in what the TSSB considered to be an offering of unregistered securities. Note that R2B Coin was a resident of Hong Kong, and its manager was an entity domiciled in Hong Kong and Dubai. R2B Coin promoters claimed that their coin would become one of the leading, most stable and most usable cryptocurrencies in the world. The Texas residents were solicited by being invited to participate in the USA Conference Calls and through the defendants’ website. The TSSB found that the R2B Coins were not registered or qualified in Texas and the defendant was not registered as a dealer with the SEC. Further, the TSSB found that the defendant engaged in fraud in connection with the offer and made misleading and deceptive statements. It is interesting to note that there is no direct connection between Texas and the defendants, other than the website offering accessible by everyone and the invitation to join one of the USA Conference Calls.
On February 9, 2018, the Attorney General for the State of New Jersey issued a cease and desist order against BitsTrade, an investment pool guaranteeing profits. The Attorney General found that the investment in the investment pool was a security and that BitsTrade failed to register itself as a broker-dealer under the New Jersey Uniform Securities Laws. Again, BitsTrade had no connection to New Jersey, other than the fact that BitsTrade had a website accessible by anyone. It is unclear whether any New Jersey residents invested into BitsTrade. Regardless of the connection, the NJ Attorney General concluded that the BitsTrade Investment was an unregistered security; BitsTrade was not registered in NJ as a broker-dealer; and it engaged in fraud by omitting to provide all of the material information regarding the company and the offering to the prospective investors.
Finally, a class action lawsuit was brought to the U.S. District Court of the Middle District of Florida against BitConnect, the crypto-lending and exchange platform that recently shut down as a result of what many believe to be a failed ponzi scheme. This lawsuit makes it BitConnect’s fifth class-action lawsuit in the U.S and the third in the State of Florida.
All of the aforementioned cases come on the heels of the Massachusetts Securities Division ordering Caviar to cease operations and the TSSB ordering AriseBank to cease operations.
State securities regulators are becoming more active and it is causing concern for an industry trying to fit the square peg of ICOs into the round hole of state and federal regulations. But the recent actions taken by state securities regulators shed light on areas that future ICO issuers should be aware of. Aside from the obvious recommendation to be accurate and avoid materially misleading statements, the following guidance has also been highlighted in several of the aforementioned cases:
State securities regulators are becoming more active and it is causing concern for an industry trying to fit the square peg of ICOs into the round hole of state and federal regulations. But the recent actions taken by state securities regulators shed light on areas that future ICO issuers should be aware of. Aside from the obvious recommendation to be accurate and avoid materially misleading statements, the following guidance has also been highlighted in several of the aforementioned cases:
- Conduct a “blue sky laws” analysis of the ICO and make notice filings or other relevant applications in the states where the company is headquartered and resident states of all investors (note that New York requires pre-filing);
- Disclose the true identity and qualifications of the issuer’s principals;
- Provide full and accurate disclosure about the issuer and the offering. Avoid grandiose claims or determinative forward-looking statements of investment growth, such as using the phrase “guaranteed” or “outstanding returns”;
- Avoid using adjectives that subjectively tout the ICO, including words like “best”; and
- Avoid inadvertently acting as a broker-dealer and transacting in securities without being properly licensed.
This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its authors, Andrew Silvia and Arina Shulga. Ms. Shulga is the co-founder of Ross & Shulga PLLC, a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of corporate and securities law.
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