On December 4, 2017, the SEC Enforcement Division’s new Cyber Unit filed its first enforcement case for a fraudulent initial coin offering (ICO). This new specialty unit was established in late September to increase the Enforcement Division’s focus on cyber-related securities law violations. The focus areas of this unit include securities laws violations involving “blockchain” technologies and ICOs.
An ICO is a fundraising event in which an entity offers participants a unique “coin” or “token” in exchange for consideration. ICOs are typically announced and promoted through public online channels and issuers usually release a “whitepaper” describing the project and the terms of the ICO. The tokens are issued on a blockchain, or cryptographically secured ledger. Generally, coins or tokens may entitle holders to certain rights, such as rights to profits. These coins or tokens may also be listed on online platforms, often called virtual currency exchanges, and are often immediately tradeable for crypto currency.
The complaint, SEC v. PlexCorps, alleges that the defendants fraudulently raised up to $15 million in an ICO from thousands of investors since August 2017 by falsely promising a 13-fold profit in less than a month. The defendants include PlexCorps, its founder – a recidivist Quebec-based securities law violator – and his business partner. The SEC’s complaint alleges that the defendants marketed and sold securities called “PlexCoin” over the internet to investors in the U.S. and elsewhere, claiming that investments in PlexCoin would yield “outlandish rewards” of a 1,354 percent profit in less than 29 days. The complaint further charges the main defendants with violating the anti-fraud and registration provisions of the federal securities laws, as well as misappropriating investment assets on “extravagant personal expenditures.” The SEC also obtained an emergency court order to freeze the assets of the main defendants.
The SEC’s Chief of the Cyber Unit admonished, “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,” and “[w]e acted quickly to protect retail investors from this initial coin offering’s false promises.”
This first action by the SEC’s new Cyber Unit confirms that the SEC will be devoting additional resources and prioritizing its policing in these areas and bringing cases that involve cyber-related violations of the federal securities laws, as discussed in a previous Drinker Biddle blog post.