SEC Alert — SEC Takes Action Against ICO Scam

What happened?

On December 1, 2017, the US Securities and Exchange Commission (“SEC”) filed charges against and obtained an emergency asset freeze on PlexCorps, a Canadian blockchain company that had allegedly raised US$15 million through an initial coing offering (“ICO”). This marks the first charges issued by the SEC’s recently created Cyber Unit.In its complaint, the SEC alleged that PlexCorps and its founder, Dominic Lacroix, violated US federal securities laws by, among other violations, making fraudulent claims regarding the profitability of participating in the ICO. Specifically, PlexCorps allegedly claimed that participants in the PlexCorps’ ICO would receive a profit of 1,354% in just under a month. The SEC is the second regulatory regime to act against PlexCorps, as Canadian regulators have already ordered PlexCorps to stop soliciting investment in its coins (PlexCoin). For Lacroix, this is not his first run-in with securities regulators. He was previously banned from dealing in securities for his role in an alleged, fraudulent micro-loan venture.

What does this mean for you?

While these are the first charges brought by the SEC’s Cyber Unit, these are not the first charges brought by the SEC against scammy ICOs. In September, the SEC charged Maksim Zaslavskiy for conducting two fraudulent ICOs for blockchain assets, one that he claimed was backed by real estate and the other diamonds.For those interested in conducting an ICO, this is another reminder that you should be very diligent in your disclosures and very deliberate with your marketing materials. Making statements about guaranteed returns is never a good idea, and is particularly dangerous in marketing a purchase of tokens. Additionally, those conducting ICOs should prepare for how they will use any proceeds of the ICO to ensure that any usage is in line with any disclosure materials that have been provided to purchasers (including through websites and social media channels).Of note, the SEC’s claim in this enforcement action is based in the treatment of the PlexCorps’ tokens as securities, however, the SEC has not provided any additional details to support such claim and we do not believe these charges should be taken as definitive evidence that all tokens are securities. In any event, these cases should be taken as evidence that frivolous uses of the ICO structure will open you up to potential securities law enforcement.For purchasers of tokens, this is another example of why you should be very diligent in reviewing all aspects of an ICO and why you should make sure that you are fully informed before making any purchase decision. Your diligence should include (among other things) a fulsome analysis of the legal documents governing the ICO, the regulatory landscape applicable to the company and the tokens, the token sale economics, the team behind the ICO, the underlying technology created (or to be created) by the team, the company’s website and social media channels (including Slack, Telegram, et al), and all other materials provided in connection with the ICO. Engaging professionals to assist with this diligence is recommended, especially if you intend to make large purchases.

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Scannavino Lamb LLP is a boutique law firm based in New York City offering legal and strategic advice to forward-thinking entrepreneurs, startup companies, and startup investors.  Founded by former Big Law lawyers with a range of experience in corporate law and business transactions, the firm serves its clients by blending world-class service with entrepreneurial perspective.  Check us out at www.scannavinolamb.com.

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