Feds shut down allegedly fraudulent cryptocurrency offering

The Securities and Exchange Commission on Monday announced that it was taking action against an initial coin offering (ICO) that the SEC alleges is fraudulent. The announcement represents the first enforcement action by the SEC's recently created cyber fraud unit.

In recent months, the SEC has been wrestling with what to do about ICOs. US securities laws impose a number of requirements on anyone who offers new investments to the public. ICOs—in which a company offers the public cryptocurrencies that could appreciate in value the way Bitcoin has—look a lot like securities offerings. But most ICOs have ignored the SEC's requirements.
At the same time, the SEC is aware that new cryptocurrencies could become an important source of innovation. And some experts argue that many new cryptocurrencies—those that serve a useful function beyond their potential to grow in value over time—are not securities, legally speaking.

So the SEC has proceeded cautiously. In July, the agency fired a warning shot. It announced that a 2016 fundraising campaign had run afoul of securities law, but that the SEC would decline to prosecute those responsible. The hope was to get the cryptocurrency world to take securities laws more seriously without doing anything drastic.

Now the SEC is taking the next step by prosecuting what it considers to be one of the most egregious scams in the ICO world.

The SEC's complaint, filed in federal court in New York, is against Dominic Lacroix, whom the SEC describes as a "recidivist securities law violator." The SEC considers Lacroix's cryptocurrency project, PlexCoin, to be a "fast-moving Initial Coin Offering (ICO) fraud that raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month."

The PlexCoin website has a hilariously vague description of this supposedly revolutionary cryptocurrency.

"The PlexCoin's new revolutionary operating structure is safer and much easier to use than any other current cryptocurrency," the site proclaims. "One of the many features of PlexBank will be to secure your cryptocurrency from market variation, which is highly volatile, and invest your money in a place where you can get interesting guaranteed returns."

The company claims that it's working on a PlexCard to allow people to spend their PlexCoin balances.

"Every purchase you make with your PlexCard will guarantee you a perfect interbank exchange rate without fees," the site claims.

The SEC isn't impressed and is arguing that PlexCoin has "all of the characteristics of a full-fledged cyber scam." The agency is seeking to freeze the assets of the PlexCoin project in hopes of getting investors' funds back to them.

Most ICOs are not outright scams, as the SEC alleges in this case. Still, the action will give many other ICO sponsors pause. Securities law goes well beyond combatting scams. Offering securities to the public without following SEC rules can get people in a heap of trouble. The SEC started with PlexCoin, but its enforcement of securities laws probably won't end there.