Difference between revisions of "Cryptocurrency fraud"

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# With a reasonable expectation of profits derived solely from the efforts of others.
# With a reasonable expectation of profits derived solely from the efforts of others.


On April 3, 2019, the SEC released its Framework for ‘Investment Contract’ Analysis of Digital Assets, which explains the application of Howey to digital assets. Using this test, many ICOs and digital assets will be considered securities – but not all – in which case, whistleblowers disclosing fraud or other violations of the federal securities laws in connection with the ICOs or digital currencies may be eligible for SEC whistleblower awards.
On April 3, 2019, the SEC released its [https://www.sec.gov/news/public-statement/statement-framework-investment-contract-analysis-digital-assets Framework for ‘Investment Contract’ Analysis of Digital Assets], which [https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets explains the application of Howey to digital assets]. Using this test, many ICOs and digital assets will be considered securities – [https://www.sec.gov/divisions/corpfin/cf-noaction/2019/turnkey-jet-040219-2a1.htm but not all] – in which case, whistleblowers disclosing fraud or other violations of the federal securities laws in connection with the ICOs or digital currencies may be eligible for [https://www.zuckermanlaw.com/sp_faq/largest-sec-whistleblower-awards/ SEC whistleblower awards].


Token sales, also known as initial coin offerings or ICOs, have become an important source of funding for cryptocurrency projects and have raised significant capital in the past few years. According to Smith + Crown, a crypto finance research firm, “ICOs provide a way for cryptocurrency project creators to raise money for their operations” and “[m]ost ICOs raise money in Bitcoin or other cryptocurrencies.” The SEC warns that certain tokens, coins or other digital assets issued on a blockchain may be considered an offer or sale of securities, and thus subject to regulation under federal securities laws, depending on the “economic realities” of the particular transaction..
Token sales, also known as initial coin offerings or ICOs, have become an important source of funding for cryptocurrency projects and have raised significant capital in the past few years. According to [https://smithandcrown.com/research/icos-and-crowdsales-over-270-million-raised-and-counting/ Smith + Crown], a crypto finance research firm, “ICOs provide a way for cryptocurrency project creators to raise money for their operations” and “[m]ost ICOs raise money in Bitcoin or other cryptocurrencies.” The SEC [https://www.sec.gov/news/press-release/2017-131 warns] that certain tokens, coins or other digital assets issued on a blockchain may be considered an offer or sale of securities, and thus subject to regulation under federal securities laws, depending on the “economic realities” of the particular transaction..


In July 2017, the SEC issued an investigative report concluding that digital tokens offered and sold by a “virtual” organization known as “The DAO,” for decentralized autonomous organization, were securities and therefore subject to the federal securities laws. The DAO had used blockchain technology to raise about $150 million in 2016. The SEC said it would not take any enforcement action against the organization, but clarified that it could have as the organization’s tokens were sold online to U.S. investors and legally qualified as securities.
In July 2017, the SEC issued an [https://www.sec.gov/litigation/investreport/34-81207.pdf investigative report] concluding that digital tokens offered and sold by a “virtual” organization known as “The DAO,” for decentralized autonomous organization, were securities and therefore subject to the federal securities laws. The DAO had used blockchain technology to raise about $150 million in 2016. The SEC said it would not take any enforcement action against the organization, but clarified that it could have as the organization’s tokens were sold online to U.S. investors and legally qualified as securities.


While the report only represents the SEC’s evaluation of one coin offering, it nonetheless confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Indeed, the SEC warned that registration “requirements apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.”
While the report only represents the SEC’s evaluation of one coin offering, it nonetheless confirms that issuers of distributed ledger or blockchain technology-based securities [https://www.zuckermanlaw.com/unregistered-broker-dealer-sec-whistleblower-lawyers/ must register offers and sales of such securities] unless a valid exemption applies. Indeed, the SEC warned that registration “requirements apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.”
 
=='''Initial Coin Offering “Pump and Dump” and Market Manipulation Schemes'''==


Initial Coin Offering “Pump and Dump” and Market Manipulation Schemes
The SEC also warns that companies claiming to be related to, or asserting that they are engaging in, ICOs may be attempting scam investors by fraudulently manipulating the market. In one market manipulation scheme, known as the “pump and dump” scheme, fraudsters seek to boost a company’s stock by issuing false or misleading statements to the marketplace. After “pumping” up the stock through these false or misleading statements, the fraudster will then “dump” their shares to quickly profit from the misinformation.
The SEC also warns that companies claiming to be related to, or asserting that they are engaging in, ICOs may be attempting scam investors by fraudulently manipulating the market. In one market manipulation scheme, known as the “pump and dump” scheme, fraudsters seek to boost a company’s stock by issuing false or misleading statements to the marketplace. After “pumping” up the stock through these false or misleading statements, the fraudster will then “dump” their shares to quickly profit from the misinformation.


In August 2017, the SEC issued an investor alert related to public companies making ICO-related claims. The investor alert was issued after the SEC suspended the trading of four companies’ shares for making “claims regarding their investments in ICOs or touted coin/token related news.” The companies affected by trading suspensions include First Bitcoin Capital Corp., CIAO Group, Strategic Global, and Sunshine Capital.
In August 2017, the SEC issued an investor alert related to public companies making ICO-related claims. The investor alert was issued after the SEC suspended the trading of four companies’ shares for making “claims regarding their investments in ICOs or touted coin/token related news.” The companies affected by trading suspensions include First Bitcoin Capital Corp., CIAO Group, Strategic Global, and Sunshine Capital.


CFTC Warns of “Pump and Dump” Schemes in Digital Currency Offerings
=='''CFTC Warns of “Pump and Dump” Schemes in Digital Currency Offerings'''==
 
In February 2018, the CFTC issued a Customer Protection Advisory warning of pump-and-dump schemes that can occur in cryptocurrency.
In February 2018, the CFTC issued a Customer Protection Advisory warning of pump-and-dump schemes that can occur in cryptocurrency.


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“Customers should avoid purchasing virtual currency or tokens based on tips shared over social media. The organizers of the scheme will commonly spread rumors and urge immediate buying. Victims will commonly react to the currency’s or token’s rising prices, and not verify the rumors. Then the dump begins. The price falls and victims are left with currency or tokens that are worth much less than what they expected. From beginning to end, these scams can be over in just a few minutes.”
“Customers should avoid purchasing virtual currency or tokens based on tips shared over social media. The organizers of the scheme will commonly spread rumors and urge immediate buying. Victims will commonly react to the currency’s or token’s rising prices, and not verify the rumors. Then the dump begins. The price falls and victims are left with currency or tokens that are worth much less than what they expected. From beginning to end, these scams can be over in just a few minutes.”


SEC Files Emergency Actions to Enjoin Cryptocurrency Fraud
=='''SEC Files Emergency Actions to Enjoin Cryptocurrency Fraud'''==
 
In late September 2017, the SEC sought an emergency order to freeze the assets of Maksim Zaslavskiy and his companies for selling digital tokens or coins that do not really exist.  Zaslavskiy touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate” and claimed that he raised $2 million and $4 million from investors when the actual amount is approximately $300,000, Click here to read the complaint.  The SEC alleges that Zaslavskiy engaged in securities fraud and engaged in the unlawful sale and offer to sell unregistered securities.
In late September 2017, the SEC sought an emergency order to freeze the assets of Maksim Zaslavskiy and his companies for selling digital tokens or coins that do not really exist.  Zaslavskiy touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate” and claimed that he raised $2 million and $4 million from investors when the actual amount is approximately $300,000, Click here to read the complaint.  The SEC alleges that Zaslavskiy engaged in securities fraud and engaged in the unlawful sale and offer to sell unregistered securities.


SEC Seeks to Enjoin $15M Fraudulent Initial Coin Offering
=='''SEC Seeks to Enjoin $15M Fraudulent Initial Coin Offering'''==
 
On December 1, 2017, the SEC filled an emergency action to stop a fraudulent and unregistered coin offering known as PlexCoin. The defendants raised approximately $15 million from investors through false and misleading statements, including, according to the SEC’s complaint, “promises that if all 400 million PlexCoin tokens for sale were sold, the early investors would reap outlandish rewards of 1,354% in 29 days or less (the supposed period of the PlexCoin ICO), and by comparing the supposed returns to those in other ICOs or investments in cryptocurrencies—returns as high as 88,000%”
On December 1, 2017, the SEC filled an emergency action to stop a fraudulent and unregistered coin offering known as PlexCoin. The defendants raised approximately $15 million from investors through false and misleading statements, including, according to the SEC’s complaint, “promises that if all 400 million PlexCoin tokens for sale were sold, the early investors would reap outlandish rewards of 1,354% in 29 days or less (the supposed period of the PlexCoin ICO), and by comparing the supposed returns to those in other ICOs or investments in cryptocurrencies—returns as high as 88,000%”


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On April 2, 2018, the SEC brought a complaint alleging that the co-founders of Centra Tech. Inc. offered and sold unregistered investments through a “CTR Token.” The company falsely promised investors that the offering would be used to create the “Centra Line” of products — a financial services system that would enable holders of various hard-to-spend “cryptocurrencies” to convert their assets easily into legal tender. In addition, the co-founders represented to investors that the “Centra Token Rewards Program” entitled investors to “rewards” of 0.8% of the total revenue that Centra earned from Centra Card transactions. The offering raised $32 million.
On April 2, 2018, the SEC brought a complaint alleging that the co-founders of Centra Tech. Inc. offered and sold unregistered investments through a “CTR Token.” The company falsely promised investors that the offering would be used to create the “Centra Line” of products — a financial services system that would enable holders of various hard-to-spend “cryptocurrencies” to convert their assets easily into legal tender. In addition, the co-founders represented to investors that the “Centra Token Rewards Program” entitled investors to “rewards” of 0.8% of the total revenue that Centra earned from Centra Card transactions. The offering raised $32 million.


SEC Halts ICO
=='''SEC Halts ICO'''==
 
On December 11, 2017, the SEC halted an unregistered ICO for a blockchain-based food review service. In a consent cease-and-desist order halting the ICO, the SEC identified key aspects of the offering that required registration:
On December 11, 2017, the SEC halted an unregistered ICO for a blockchain-based food review service. In a consent cease-and-desist order halting the ICO, the SEC identified key aspects of the offering that required registration:


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“Investors’ profits were to be derived from the significant entrepreneurial and managerial efforts of others – specifically Munchee and its agents – who were to revise the Munchee App, create the “ecosystem” that would increase the value of MUN (through both an increased demand for MUN tokens by users and Munchee’s specific efforts to cause appreciation in value, such as by burning MUN tokens), and support secondary markets.”
“Investors’ profits were to be derived from the significant entrepreneurial and managerial efforts of others – specifically Munchee and its agents – who were to revise the Munchee App, create the “ecosystem” that would increase the value of MUN (through both an increased demand for MUN tokens by users and Munchee’s specific efforts to cause appreciation in value, such as by burning MUN tokens), and support secondary markets.”
The offeror (Munchee) made public statements or endorsed other people’s public statements that touted the opportunity to profit. For example, Munchee created a public posting on Facebook, linked to a third-party YouTube video, and wrote “199% GAINS on MUN token at ICO price! Sign up for PRE-SALE NOW!”
The offeror (Munchee) made public statements or endorsed other people’s public statements that touted the opportunity to profit. For example, Munchee created a public posting on Facebook, linked to a third-party YouTube video, and wrote “199% GAINS on MUN token at ICO price! Sign up for PRE-SALE NOW!”
SEC Warns About Initial Coin Offerings
 
=='''SEC Warns About Initial Coin Offerings'''==


The SEC’s Office of Investor Education and Advocacy recently issued an investor bulletin warning investors about the risks of investing in ICOs.  According to the bulletin, investors should be alert to the following warning signs:
The SEC’s Office of Investor Education and Advocacy recently issued an investor bulletin warning investors about the risks of investing in ICOs.  According to the bulletin, investors should be alert to the following warning signs: