Report: Some Crypto Firms that Settled with the SEC May Not be Able to Cover Mandated Settlements

Some cryptocurrency firms that were the target of the Securities and Exchange Commission Division of Enforcement may not be able to adhere to the agreed-upon settlements, according to WSJ.com.

Paragon and Airfox are both mentioned in the report. The two companies were deemed to have issued unregistered securities in an initial coin offering. Both companies were sanctioned by the SEC in November of 2018.

According to the report, Airfox has received an extension from the SEC to later December.

Paragon, on the other hand, may have missed its deadline to pay a mandated fine of $250,000 – the amount as Airfox. Both companies had to submit to a recission offer and it is not clear how much, if any, money will be returned to investors.

Of course, the problem comes down to money and whether or not any firm sanctioned by the SEC has sufficient resources to pay assessed fines or give money back to investors.

The WSJ report quotes Michael Dick, an attorney and former member of the SEC Division of Enforcement who said he was skeptical if these firms to abide by the mandated settlement:

“I looked at it then and look at it now as impractical, because for many projects they spent the money in accordance with what they told purchasers they would spend the money on – to build out the project. This kind of remedy really only works well when an issuer can pay back [the money].”

Of note, AirFox appears to be fully operational with active social media feeds. A recent Tweet claims that Airfox has doubled in size over the past year.

 

Things have been quieter at Paragon. According to its website, Paragon began processing claims from investors on August 23, 2019, with the claims period expiring on November 21, 2019.

Telegram Files Response to SEC Action Blocking US Token Sales

Lawyers for Telegram have responded to the SEC complaint that led a judge in October to temporarily forbid the sale of GRAM tokens to retail investors in the US.

Telegram, provider of a popular encrypted messaging app (Messenger) that permits anonymous communicating, was started by brothers Pavel and Nikolai Durov.

Telegram Messenger is very popular among cryptocurrency traders and is allegedly used by a number of powerful crypto “pump-and-dump” groups to manipulate crypto prices.

The Durov brothers created VKontakte, a Russian social network similar to Facebook. But after criticizing the Russian government, Pavel Durov lost control of VKontakte and went into exile.

In late 2017, Telegram announced that it planned to create a global public blockchain called TON (Telegram Open Network).

Theoretically, the network would function somewhat like a high volume Bitcoin, ie. in a “decentralized” manner controlled by no-one and hosted on an array of computers scattered across the globe (in multiple jurisdictions).

Telegram intended that TON would form the basis of a payments layer to undergird Telegram Messenger (this is similar to Facebook’s proposed Libra currency network).

To raise money for the project, according to the company’s latest filing, Telegram pursued a, “legal private placement pursuant to valid exemptions to registration between January 2018 and March 2018 through which they raised approximately $1.7 billion from 171 purchasers.”

Parameters of the token sale restricted private investors from passing on the tokens to retail until after the TON blockchain was built and operating.

Private investors in Japan and Korea, however, began re-selling their GRAM tokens to retail earlier this year.

Telegram promised to refund investors’ money if the TON blockchain was not up and running by October 31, 2019.

If all had gone according to plan, upon that date, up to 220 billion GRAM tokens would have become available to retail investors across the globe, including the US (Telegram capped the number of tokens at 500 000 000 and issued 44% to private investors).

But the SEC threw a spanner in the works when it argued successfully in October that the sale of GRAM on the open market would constitute a public offering of an unregistered security.

If Telegram’s filing is an indication, the company lawyers plan to contest, line by line, almost every assertion forwarded in the SEC complaint

For example:

“…Plaintiff’s claims are without merit as Telegram’s private placement to highly sophisticated, accredited investors was conducted pursuant to valid exemptions to registration under the federal securities laws and Grams will not be securities when they are created at the time of launch of the TON Blockchain.”

Telegram lawyers argue that GRAMs will behave as a currency or commodity and not a security although there is was no indication in the original white papers that GRAMs were designed to be stablecoins (cryptocurrencies that do not significantly fluctuate in value).

Telegram also contends that the SEC has failed to provide meaningful guidance to the crypto token sector and, with this action against Telegram, has engaged in, “‘regulation by enforcement’ in this nascent area of the law…and has now adopted an ad hoc legal position that is contrary to judicial precedent and the publicly expressed views of its own high-ranking officials.”

In its original filing against Telegram, the SEC cited its 2017 DAO Report, “concluding DAO tokens, a digital asset, were securities.”

It also argued outright in the filing, “Grams are investment contracts,” and that the sale bore features of a security as defined by the Howey Test:

“Based on Telegram’s own promotional materials and other acts, a reasonable purchaser of Grams would view their investment as sharing a common interest with other purchasers of Grams as well as sharing a common interest with Defendants in profiting from the success of Grams. The fortunes of each Gram purchaser were tied to one another and to the success of the overall venture, including the development of a TON ‘ecosystem,’ integration with Messenger, and implementation of the new TON Blockchain. Investors’ profits were also tied to Telegram’s profits based on Telegram’s significant holdings of Grams…”


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New York District Court Postpones Telegram’s TON Hearing to February 2020

The US District Court for the Southern District of New York postponed the hearing regarding the Securities and Exchange Commission’s (SEC) injunction filing against London-based encrypted messaging service provider Telegram. 

The hearing has been scheduled to take place on February 18–19, 2020.

Telegram’s management had issued a statement on October 16 in which it argued that its native Gram token was not a financial security. The messaging giant also requested that the preliminary injunction should be denied. The SEC responded to Telegram’s counterclaim with a new filing in the New York Court on October 17.

Telegram was scheduled for a court hearing in New York on October 24, according to a temporary restraining order obtained by the SEC on October 11. However, the latest court order shared with Cointelegraph notes that the hearing has been rescheduled for next year on February 18-19. 

“IT IS ORDERED that Defendants shall not offer, sell, deliver, or distribute ‘Grams’ to any person or entity, until the conclusion of the hearing scheduled by the Court for February 18 and 19, 2020 (‘Hearing’), except upon further order of the Court or agreement of the parties. At the Hearing, any party may move the Court for the continuation or dissolution of this Order.”

The SEC recently alleged that the Telegram Group violated US securities laws by conducting an illegal initial coin offering. The federal regulator is also seeking a preliminary injunction to prevent the messaging giant from further violations.

The SEC noted that Telegram’s move to deny the injunction could allow the company to further violate regulatory guidelines. This would put pressure on authorities to obtain another temporary restraining order, the SEC said.

The SEC announced an emergency action against Telegram on October 11, which was only a few weeks before the scheduled launch of the Telegram Open Network (TON) blockchain mainnet. 

Telegram requested a US court to deny the SEC’s action, which led to the SEC seeking a preliminary injunction. 

Although Telegram proposed to delay the launch of the TON network, a “force majeure” clause in the purchase agreement contract for TON’s Grams suggests that Telegram might not honor its obligations to return investors’ funds from the sale of the tokens if there’s a delay.

Telegram’s investors have to decide whether to postpone the TON network launch by October 23. If the proposal passes, then TON would be scheduled to launch on April 30, 2020.

Seamico Securities Gets Green Light from Thai SEC to Fire Up ICO Portal

Seamico Securities, which has been awaiting the green light to fire up an ICO portal called SE Digital inThailand, says it has been informed by the Thai Securities and Exchange Commission that it may, “initiate its business.”

As per a letter hosted on the Seamico website:

“According to the Reference letter(,) Seamico Securities Public Company Limited…informed the Stock Exchange of Thailand that SE Digital Company Limited… a 99.99% subsidiary of the Company(,) has obtained an approval to operate as an ICO Portal but subject to demonstrating the readiness of the ICO Portal platform.”

“Please note that the Office of Securities and Exchange Commission has informed SE Digital on 7 October 2019 that the operational system to operate as an ICO Portal is ready and SE Digital would be able to initiate its business.”

Seamico describes itself as a, “professional financial company…offer(ing) innovative investment products,” in Thailand. The company “officially launched” in 1974, and, “has been approved by the Ministry of Finance and the Securities and Exchange Commission to engage in business activities related to the securities industry including Securities Brokerage, Securities and Derivatives Trading, Investment Advisory, Securities Underwriting, Financial Advisory, Derivatives Agent and Asset Management.”

The letter was written by Chaipatr Srivisarvacha, Seamico vice chair and CEO and addressed to the president of the Stock Exchange of Thailand.

Elevated Returns Founder and President Stephane de Baets used the announcement as an opportunity to promote his own company’s efforts to establish a similar “digital asset” portal in Thailand.

Of note, de Baets and Elevated Returns previously issued the Aspencoin security token based on a real estate asset that was said to be the first of its kind.

The successful launch of the Thai portal, de Baets and Elevated hope, will be followed by a pan-Asia expansion.

Baets tweeted:

“We are thrilled to announce that Seamico Securities, an invaluable component of the Elevated Returns investment portfolio, has been granted its full digital assets portal license by the Thailand Securities Exchange Commission.”

“As Elevated Returns has its own application in process with the Thai SEC for a digital assets private exchange license–technology built entirely in Tezos blockchain–our goal is to first establish a full ecosystem in Thailand before expanding operations to other countries such as Taiwan, Korea, Japan, the Philipines, Indonesia and Singapore. Seamico’s latest development falls perfectly in line with our global strategy, and paves the way for the launch of a series of investment tokens to the general public through regulated and compliant offerings. Though the digitization of financial markets is certain, the path to implementation and adoption is rigorous. Therefore, we applaud Seamico Securities for accomplishing this milestone achievement.”

Sandwiched between Elevated’s tweets regarding SE Digital and Seamico is another one in which Baets announces that, “Capital flight into crypto and alt coins is happening @ElevatedReturns.”

A twitter user responded, asking, “Where? I cannot see anything happening!”

Baets did not elaborate.

Telegram Enforcement Action: “A reminder that the SEC not only has considerable enforcement tools but is willing to use them”

Last week, Crowdfund Insider reported on the Securities and Exchange Commission (SEC) enforcement action against Telegram and the issuance of Gram tokens. The move by the SEC is a doozy and telling.

First, Telegram sold about $1.7 billion in a SAFT (simple agreement for future tokens) that appeared to abide by the rules. Telegram filed a Form D and apparently only sold to accredited investors in the US. As CI has heard, the token offering was wildly popular at the time of the offering.

But the SEC’s “emergency action” was predicated on the expectation the Gram tokens would be available to the general public and thus akin to an initial public offering (IPO).  Once the Grams hit various and sundry crypto exchanges – anyone would be able to purchase them – not just the accredited investor types. In the US, an IPO requires registration with the SEC, a significant undertaking.

We have received several comments on the SEC’s move to target an issuer that is not US-based but sold to US investors, approximately 39 purchasers who committed in total $424.5 million, according to the SEC’s complaint.

Dror Futter, an insider who frequently comments on the emerging digital asset sector and a partner at Rimon Law, told Crowdfund Insider that this is a reminder that the SEC carries a very big stick:

“For those that thought the Block.one settlement represented a kinder, gentler SEC, a reminder that the SEC not only has considerable enforcement tools but is willing to use them,” said Futter. “Telegram certainly has the war chest to fight and at least on the surface, appears to have a better fact pattern than Kik.  If this case actually makes it to trial, it will represent an interesting opportunity for a ruling on the securities status of SAFTs. Literally billions of dollars were raised using these instruments. Most provided for conversion to tokens when their platform went live. Presumably, over the next months, more platforms will come online and raise the same set of issues.”

[easy-tweet tweet=”If this case actually makes it to trial, it will represent an interesting opportunity for a ruling on the securities status of SAFTs. Literally billions of dollars were raised using these instruments” template=”light”]

In comparing the SEC complaint against Kik and the one delivered to Telegram,  the SEC seems to have taken somewhat different positions on the nature of the securities violation, explained Futter.

“In Kik, the SEC stated:  “Although Kik’s SAFT specifically stated that the SAFT was itself a security, it failed to state that the Kin to be delivered under the SAFT were securities sold pursuant to the SAFTs. And although Kik’s PPM claimed that the offer and sale of the SAFTs were subject to an exemption from registration under Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder, among other United States laws, Kik did not claim any exemption for the offer and sale of Kin through the SAFT. As such, Kik’s offer and sale of the SAFTs and Kik’s offer and sale of the Kin purchased under the SAFTs were not registered.”

In other words, it was the issuance of the Kik token that constituted the securities regulation.

“With Telegram, the complaint stated that once purchasers resell the tokens “Telegram will have completed its unregistered offering with billions of Grams trading on multiple platforms to a dispersed group of investors.”  In other words, it is the resale of tokens upon issuance that gives rise to the securities violation.”

Philip Moustakis, counsel at Seward & Kissel LLP and former SEC Senior Counsel who was a member of the SEC’s Cyber Unit from its inception, where he focused on cryptocurrencies and initial coin offerings, had this to say:

“According to the SEC’s complaint, between January and March 2018, Telegram raised approximately $1.7 billion from sales of 2.9 billion Grams to 171 investors, $424.5 million of which was raised from 39 U.S. investors. One thing that makes the case different from some other ICOs the SEC has pursued is that the tokens have not yet been delivered to the investors. This allowed the enforcement staff to step in and attempt to prevent the tokens from being disseminated in the U.S. and resold in the secondary market, at which point it would have been a far more complicated endeavor to unwind or bring the offering into compliance.”

Moustakis said the case has significance because it shows the SEC will pursue overseas issuers of digital assets or cryptocurrencies who offer and sell those assets into the U.S. or otherwise access the U.S. capital markets.

“And, together with the recent Block.one settlement, this filing demonstrates the SEC has the wherewithal to investigate and prosecute the largest ICOs or digital asset issuers,” added Moustakis. “For closer watchers of the SEC’s activity in the cryptocurrency space, the case is interesting for another reason.  Here, according to the SEC’s complaint, the promoters have taken the position that, while the token purchase agreement for the Gram was a security, the token itself is not.  It is noteworthy to see an issuer take this position because SEC Chairman Clayton has said we need to separate ICOs from cryptocurrencies and that ICOs, on the whole, are securities offerings, but it does not necessarily follow that all cryptocurrencies are securities.”

[easy-tweet tweet=”this filing demonstrates the #SEC has the wherewithal to investigate and prosecute the largest #ICOs or digital asset issuers” template=”light”]

Moustakis pointed to comments issued by the SEC Director of the Division of Corporation Finance Bill Hinman, as well as other members of SEC senior management.

“In its complaint against Telegram, however, the SEC alleged there was no such separation between the Gram offering and the Gram token. Rather, the SEC alleged, the offering was a traditional capital raise because, among other things, the company used funds raised for operations and to build out its network, there were no goods or services for which one might use the Gram, and Gram purchasers had a reasonable expectation of sharing in the company’s profits should it succeed in building out the functionalities it promised.”

So where to now?

A letter is circulating around the crypto-sphere that is allegedly from Telegram staff indicating they are evaluating their options while claiming they attempted to communicate with SEC for 18 months. As the Gram tokens were supposed to be issued by the end of this month, expect greater clarity from Telegram sooner rather than later.

Plexcoin ICO Hit with $7 Million Final Judgement in SEC Enforcement Action

It has been a big week for enforcement actions at the Securities and Exchange Commission (SEC). Beyond the routine fraud cases, the SEC Division of Enforcement has announced settlements with several high profile initial coin offerings (ICO). Today, the Plexcoin ICO landed squarely in the sights of the Enforcement Division.

According to a release, the SEC announced a final judgment against the Plexcoin ICO who consented to the judgment that enjoined the proprietors from future violations of the antifraud provisions of the federal securities laws and ordering them to pay nearly $7 million.

According to the SEC’s complaint, filed Dec. 1, 2017, PlexCorps, and its proprietors Dominic Lacroix and Sabrina Paradis-Royer, fraudulently raised millions of dollars in virtual and fiat currency from the unregistered sales of securities.

On October 2, 2019, the U.S. District Court for the Eastern District of New York, entered a final judgment against PlexCorps, Lacroix, and Paradis-Royer.

The Defendants, without admitting or denying the allegations in the SEC’s complaint, are enjoined from further violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule l0b-5 thereunder, and Lacroix and Paradis-Royer are additionally enjoined from participating in any digital-securities offerings.

The Defendants must disgorge $4,563,468 in gains from the PlexCoin ICO plus $348,145 in prejudgment interest.

Lacroix and Paradis-Royer are ordered to each pay a $1,000,000 civil penalty.

Lacroix also is permanently barred from serving as an officer or director of a publicly-traded entity.

The final judgment requires the Defendants to forego their rights to the entirety of the investor funds seized by a receiver appointed by the Superior Court of Quebec, totaling approximately $4 million, as well as $800,000 in investor funds.

The SEC anticipates coordinating any distribution to harmed investors with the Autorité des marchés financiers of Quebec.

The SEC first revealed an emergency action against Plexcoin back in December 2017.

Siacoin Makers Settle with SEC, Pay $225K Fine for Issuing Unregistered Securities

Without admitting or denying anything, Nebulous, a company that raised $120,000 USD in two early-days digital token sales, has settled with the SEC and agreed to pay approximately $225,000 USD in disgorgements and penalties.

Nebulous maintains the Sia Network, a “decentralized cloud storage platform…more robust and more affordable than traditional cloud storage providers.”

Like bitcoins and ethers, Siacoins are the native coins of the Sia Network. The coins are ‘mined’ (produced by intensive computing) and are needed to access the network’s services, in this case cloud storage.

According to the SEC, Nebulous sold its first round of  “Siastock” on May 11, 2014, and promised investors, “Owning Siastock gives you a guaranteed income proportional to the value of storage being rented from the Sia network.”

The company sold ‘SiaNotes’ in the following days. The SEC says Sianotes, “are …described as instruments that were convertible into Siastock once Nebulous launched the Sia network and user application.”

On its website, Nebulous gives the following account of the offerings and settlement:

“In May 2014, Nebulous conducted a $120,000 offering of a token called Sianotes, which were converted to Siafunds upon network launch in 2015. The offering took place through Bitcointalk.org, three months before the Ethereum offering. During these earliest stages of development of blockchain technologies, the Nebulous team did not anticipate that the SEC might later deem Sianotes or any other blockchain assets to be securities.”

The company says it did not come under investigation until after it conducted, with the help of “sophisticated securities counsel,” a $1.5M Regulation D offering of ‘Siafunds’ in April 2018.

SEC investigators ultimately concluded that Siafunds were securities and that, “the failure to register the 2014 offering and 2015 conversion constituted violations of Section 5 of the Securities Act of 1933.”

Nebulous CEO Zach Herbert said he is disappointed that the SEC decided to go after his company even though the 2014 fundraises occurred before the SEC had issued its DAO Report of Investigation.

The SEC DAO Report is regarded by many as the SEC’s first clear addressing of the phenomenon of crypto tokens/ICOs:

“(W)e were disappointed that the SEC chose to take action with respect to the relatively small offering conducted years before we had the benefit of that guidance.”

Some SEC officials have countered that the Howey Test of 1933 clearly indicates that ICOs bear features of securities.

Herbert also told The Block that the SEC’s fine to Nebulous was disproportionate when compared to one paid by Block.one this week:

“While disappointed that the SEC chose to pursue a steep penalty of almost double what we raised in our 2014 offering of Siafunds, especially compared to their lax handling of EOS, we view this settlement as highly positive for Sia.”

Block.one, creator of the EOS network, claims it raised $4 billion USD in a year-long ICO raise to build a purportedly high-performance blockchain network.

Block.one was fined $24 million USD this week, which represents only 0.06% of what was raised.

Herbert said that Nebulous is nonetheless, “pleased at how the company and the network fared under such intense regulatory scrutiny and that after a thorough investigation, the SEC asserted no claims regarding Siacoins or the current operations on the Sia network.”

Thought the two early Sia raises were modest, Siacoins, which were issued for around $0.000061 USD, eventually traded for up to $0.10 USD in the crypto bull market of late 2017 and early 2018. The highest market cap for the coin was about $320 million USD.

Charts indicate the current Siacoin market cap is about $74 million USD, and that the current coin price is about $0.0017 USD.

In July of 2019, Sia announced a $3.25 million seed round backed by Bain Capital Ventures.

Block.one, Creator of EOS Blockchain, Pays $24 Million Fine to SEC for Conducting $4 Billion ICO, Company “Excited to Resolve” Issue

EOS.io on iPhone

The US Securities and Exchange Commission (SEC) has settled charges against Block.one, high-profile creator of the blockchain network EOS, for allegedly conducting an unlicensed multi-billion USD ICO (initial coin offering) crowdsale.

Block.one has agreed to pay a $24 million USD civil penalty:

“The Securities and Exchange Commission today announced settled charges against blockchain technology company Block.one for conducting an unregistered initial coin offering of digital tokens (ICO) that raised the equivalent of several billion dollars over approximately one year.  The company agreed to settle the charges by paying a $24 million civil penalty.”

Block.one is characterizing the settlement as a victory.

Block.one claims it raised $4 billion USD (without a live product) through the sale of EOS tokens in ICO token sales that began in June 2017 and continued for a year.

EOS is billed as a “decentralized application” (data system controlled by no single party) with built-in smart contract capability.

EOS purportedly offers “decentralized storage” to enterprises and individuals and aims to resolve the scalability problems hobbling blockchains like Bitcoin and Ethereum, which can sometimes take many minutes to settle a transaction.

According to Wikipedia:

“EOSIO operates as a smart contract platform and decentralized operating system intended for the deployment of industrial-scale decentralized applications through a decentralized autonomous corporation model. The smart contract platform claims to eliminate transaction fees and also conduct millions of transactions per second.”

Unfortunately, the SEC claims Block.one conducted it’s year-long ICO fundraise without properly registering EOS tokens as securities:

“Block.one, which has operations in Virginia and Hong Kong, conducted an ICO between June 2017 and June 2018….Block.one stated it would use the capital raised in the ICO for general expenses, and also to develop software and promote blockchains based on that software… Block.one did not register its ICO as a securities offering pursuant to the federal securities laws, nor did it qualify for or seek an exemption from the registration requirements.”

Block.one may have been flagrant about the timing of its ICO, the SEC’s press release suggests:

“Block.one’s offer and sale of 900 million tokens began shortly before the SEC released the DAO Report of Investigation and continued for nearly a year after the report’s publication, eventually raising several billion dollars worth of digital assets globally, including a portion from US investors.”

The release of the SEC’s DAO Report of Investigation in late July 2017 is regarded as the defining moment for ICO’s (initial coin offerings) in America.

The SEC has repeatedly stated since its DAO-era determination that ICOs are securities.

The Cease and Desist order against EOS issued September 30th clearly states:

“Based on the facts and circumstances set forth below, the (EOS) ERC-20 Tokens were securities under the federal securities laws pursuant to SEC v. W. J. Howey Co., 328 U.S. 293 (1946), and its progeny…”

The press release accompanying the DAO report tells the public unequivocally that, henceforth, “offers and sales of digital assets by ‘virtual’ organizations are subject to the requirements of the federal securities laws.”

It would take six more months for the crypto bubble to pop following the release of the SEC’s DAO Report, but anyone listening was now officially on notice.

Like many others, EOS founders apparently ignored the DAO report and proceeded with an EOS token sale to US investors and others regardless.

EOS-creator Dan Larimer had already created several crypto platforms and tokens, including Steem and BitShares.

The SEC also alleges the company did not properly inform the public when it sold the EOS ICO.

According to Steven Peikin, Co-Director of the SEC’s Division of Enforcement:

“Block.one did not provide ICO investors the information they were entitled to as participants in a securities offering…The SEC remains committed to bringing enforcement cases when investors are deprived of material information they need to make informed investment decisions.”

Block.one has consented to pay the $24 million USD fine, “without admitting or denying (the SEC’s) findings.”

In a public statement, Block.one said they were “excited to resolve” the discussions with the SEC, and said it is committed to ongoing collaboration with regulators and policy makers.

Block.one said the token in question is no longer circulating:

“The settlement relates specifically to the ERC-20 token sold on the Ethereum blockchain during the aforementioned period, which is no longer in circulation or traded, and will not require the token to be registered as a security with the SEC. The settlement resolves all ongoing matters between Block.one and the SEC.”

The company also said it has been granted “a waiver” exempting it from “certain ongoing restrictions”:

“The SEC has simultaneously granted Block.one an important waiver so that Block.one will not be subject to certain ongoing restrictions that would usually apply with settlements of this type. Block.one believes the SEC’s granting of this waiver evidences Block.one’s continuing commitment to compliance and best practices in the United States and globally.”

If Block.one had been required to register EOS as a security, it would have been obligated to engage expensive and ongoing reporting requirements.

The $24 million USD fine against Block.one represents only 0.06% of the $4 billion USD the company claims it raised. Other ICO sellers have faired worse in their dealings with the SEC.


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Report: Embattled ICO-Issuer Kik Closing Down Messaging App

Two individuals who requested anonymity are claiming that Kik has begun disbanding the Isreali subsidiary responsible for running its messaging app, CalcalistTech reports.

According to the outlet:

“The company is moving all the app’s users to alternative platforms…The 70 employees of Kik’s Israeli cryptocurrency subsidiary Kin received layoff notices Monday, though some will be offered the option of transferring to a new company that is based on the same technology.”

Kik is an Ontario-based tech company started in 2009. The company launched a messaging app for teenagers in 2010, and experienced some initial success.

But Kik recently gained the dubious distinction of being the subject of the US Securities and Exchange Commission’s (SEC’s) “first major ICO (initial coin offering) enforcement action.”

Hundreds, if not thousands, of entities issued Ethereum-enabled ICO’s in 2016. And many projects were advised by lawyers that the tokens might get a pass from the SEC because they offered purported utility on a future network.

After receiving a Wells Notice (of impending action) from the SEC early this year, Kik promised to fight the SEC and immediately set up a “crypto defense fund” and a website called Defend Crypto as a base for the fight.

Text at Defend Crypto claims, “The SEC has been shaping the future of crypto behind the scenes with settlements that set a dangerous precedent and stifle innovation.”

Some household names in crypto initially threw their support behind Kik and Defend Crypto, but then withdrew their support in subsequent days after a potentially damning video of Kik CEO Ted Livingston surfaced in which he touts possible returns for investing in Kik.

Kik raised approximately $100 million USD in an ICO token sale the company executed in 2017.

By then, however, the SEC had already issued its DAO Report warning would be ICO-issuers that their offerings would henceforth very likely be considered unregistered securities by the Commission.

Kik proceeded with the sale regardless, in a decision the SEC now says was induced by “a crisis” at the company:

“In late 2016 and early 2017, Kik faced a crisis. Fewer and fewer people were using Kik Messenger. The company expected to run out of cash to fund its operations by the end of 2017, but its revenues were insignificant, and executives had no realistic plan to increase revenues through its existing operations. In late 2016 and early 2017, Kik hired an investment bank to try to sell itself to a larger technology company, but no one was interested.”

“Faced with a shrinking financial ‘runway,’ Kik decided to ‘pivot’ to an entirely different business and attempt what a board member called a ‘hail Mary pass’: Kik would offer and sell one trillion digital tokens in return for cash to fund company operations and a speculative new venture.”

According to Calcalist, Kik’s “Kin” tokens are now almost worthless, and currently, trade for $0.000012 USD.

More ICO Fraud: SEC Charges Jonathan C. Lucas and Fantasy Market, an Adult Entertainment Marketplace, for Fraudulent ICO

The Securities and Exchange Commission (SEC) has filed its latest complaint targeting another allegedly fraudulent initial coin offering (ICO).

According to a release, the SEC has charged Jonathan C. Lucas, the former founder and CEO of Fantasy Market, an online adult entertainment marketplace, with orchestrating a fraudulent ICO.

The SEC states that beginning in August 2017, Lucas raised approximately $63,000 in crypto from over 100 investors in an unregistered securities offering. The “Fantasy Market digital token” (FMT) sought to be used as payment for specific requested activities in adult entertainment purposes. The ICO sought to raise up to $25 million.

Fantasy Market is now defunct.

The SEC says that among other alleged misstatements, Lucas claimed that a “working-beta” version of the company’s adult-entertainment platform existed when one did not, presented a fictitious management team, and misrepresented his own experience.

After garnering media attention over investor complaints, the complaint states, Lucas returned the funds raised to investors, adds the SEC.

Lucas has consented, without admitting or denying the allegations in the complaint, to the entry of a final judgment that imposes permanent injunctions from violations of the charged provisions; orders him to pay a civil penalty of $15,000; and imposes a five-year officer and director bar and a five year conduct-based injunction prohibiting Lucas from participating in any unregistered offering of securities, digital or otherwise, except for securities transactions for his own personal account.

The proposed settlement is subject to court approval.

The SEC has consistently pursued any ICO that took place post-DAO report, a document published by the SEC indicating the ICOs may be unregistered securities. The document was published in July 2017.


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ICOBox and Founder Nikolay Evdokimov Sued by Securities and Exchange Commission Targeting $14 Million ICO as Illegal Securities Offering

ICO Securities Fraud

The Securities and Exchange Commission (SEC) has continued its long march of enforcement actions regarding initial coin offerings (ICO) and the platforms that supported them. According to the SEC, ICOBox and founder Nikolay Evdokimov conducted an “illegal $14 million securities offering of ICOBox’s digital tokens (ICOS) and for acting as unregistered brokers for other digital asset offerings.” The complaint also states that ICOBox exposed thousands of investors to “risky investments” without providing necessary protections as required by law.

The SEC’s complaint references an ICO that ICOBox conducted in 2017. The ICO raised approximately $14.6 million in an offering of “tokens” to more than 2000 investors. The offering took place after the SEC DAO report – a line in the sand moment for the ICO industry. The SEC has consistently taken legal action against any ICO issuer post-DAO report if they have been deemed as issuing unregistered securities or other acts of fraud. ICOBox attempted to position their token as a utility and not a security.

The SEC complaint alleges that “defendants claimed the tokens would increase in value upon trading and that ICOS token holders would be able to swap them at a discount for other tokens promoted on the ICOBox platform.”

According to the complaint, the ICOS tokens are virtually worthless. According to CoinMarketCap, ICOS last traded at $2.41 per token, a fraction of the original issuance price.

The complaint further alleges that ICOBox failed to register as a broker but acted as one.

“By ignoring the registration requirements of the federal securities laws, ICOBox and Evdokimov exposed investors to investments, which are now virtually worthless, without providing information that is critical to making informed investment decisions,” stated Michele Wein Layne, Regional Director of the SEC Los Angeles Regional Office.

The SEC’s complaint charges ICOBox and Evdokimov with violating the registration requirements of the federal securities laws and seeks injunctive relief, disgorgement with prejudgment interest, and civil money penalties.

ICOBox announced the conclusion of its ICOS program in March of 2019. The company has claimed that over its lifetime it helped 80 projects enter the market and “collect about $670 million via their ICOs.” ICOBox also claims that in a little over 18 months of its operations, the program received 4,555 applications with 200 projects being selected. ICOBox claimed a fee of 1.5% of the amount raised. ICOBox appears to have shifted into security token offerings and the SEC states that ICOBox’s conduct is ongoing.

ICOBox also conducted the sale of the Paragon Coin, an earlier target of an SEC enforcement action which is now in the midst of a recission of the offering.


Another Lawsuit Filed Against Vancouver Crypto Consultancy Vanbex

Vanbex principles Lisa Cheng and Kevin Hobbs, chief architect Brian Onn, developer Jeffery Walsh and TD bank have been named in a class action suit filed in the Supreme Court of British Columbia August 26th by two BC residents who say the lost $30 000 CAD each by investing in Vanbex’s FUEL ICO (initial coin offering), Business in Vancouver (BIV) reports.

Vanbex raised more than $33 million USD by selling FUEL tokens in an ICO sale for $0.10 USD in October 2017.

Fuel tokens currently trade for $0.002582 USD.

According to the August 26th filing, the plaintiffs are alleging the FUEL token sale was an illegal offering of securities:

“The plaintiffs and class members have suffered the loss of their full investments in Fuel tokens purchased from Vanbex. Fuel tokens cannot legally be sold, without approval from the regulator and compliance with the Securities Act. In addition, Vanbex is not a viable business and has not met its milestones. The Fuel tokens have no real, legal value.”

The filing also alleges that TD was remiss in not investigating Hobbs’ accounts for possibly fraudulent activity. As well, according to BIV, “The filings also claim that TD did not properly discharge its duty to warn other financial institutions, which were transferring funds into Vanbex’s TD account.”

Hobbs and Cheng recently lost a bid to have their assets, including a luxury condo in Coal Harbour and two Range Rovers, released after they were confiscated ex parte under orders from the BC Director of Civil Forfeiture.

The Office froze the assets after determining they might be proceeds of crime based on assertions made by the Royal Canadian Mounted Police (RCMP), who alleged Hobbs and Cheng fraudulently conducted the Etherparty/FUEL token raise, “…by falsely representing corporate investment opportunities.”

The Vancouver Sun has also reported on Hobbs’ alleged criminal history.

In 2005, he was reportedly caught in a New York hotel room in possession of 45 pounds of marijuana and $178,000 USD in cash.

As well:

“In 2008, Hobbs was convicted in Nova Scotia of possession of property obtained by crime and money laundering, a result of being found with $32,000 in a suitcase before boarding a flight to Vancouver…(and was later) convicted in Nova Scotia for drug trafficking and unlawfully producing marijuana. He received a 30-month sentence.”

Cheng and Hobbs are also being sued by a former employee who alleges they misrepresented Vanbex company prospects, intentionally inflicted emotional damage on him, “constructively-dismissed” him and defamed him in Vancouver business circles.

According to BIV, in the class action filed August 26th, “the plaintiffs are seeking general and punitive damages as well as restitution for benefits received by the defendants from the sale of the Fuel token and a declaration that Vanbex broke the securities act.”

SEC Settles Fraud Charges Filed Against Crypto Exchange Bitqyck and its Founders, Claims $13 Million in Unregistered Securities Offering

The Securities and Exchange Commission (SEC) has settled charges with Bitqyck Inc. and its founders, Bruce Bise and Sam Mendez. The SEC alleges that Biqyck and its founders defrauded investors and operated an unregistered exchange. Bitqyck also created and maintained its own online trading platform called TradeBQ.com

According to the SEC’s complaint, Biquyck­ created and sold Bitqy and BitqyM in unregistered securities offerings to more than 13,000 investors, raising more than $13 million.

The SEC claims that between December 2016 and February 2019, Bitqyck promoted two digital tokens,  Bitqy and BitqyM, to prospective investors in 45 U.S. states, two U.S. territories, and 20 countries through “multiple, fraudulent unregistered digital asset securities offerings.”

The defendants allegedly told investors every investor who purchased a Bitqy token would “automatically receive one-tenth of one share of Bitqyck common stock through the operation of a “smart contract” associated with the token.”

The SEC states that no smart contract associated with the token included equity and no ownership was ever transferred.

The SEC complaint states:

“Bise and Mendez controlled Bitqyck’s bank accounts and funds, paid themselves distributions from the Bitqyck bank accounts funded exclusively with investor funds, and used those accounts to pay for their own personal expenses. Between personal distributions and payments for personal expenses, Bise received at least approximately $684,092 and Mendez received approximately $644,821 in ill-gotten gains. Defendants paid $4.5 million as sales commissions to investors who referred new investors to Bitqyck. Collectively, investors lost more than two-thirds of their investments.”

David Peavler, Director of the SEC’s Fort Worth Regional Office, commented on the SEC action:

“Because digital investment assets represent a new and exciting technology, they can be very alluring, especially if investors believe they are getting in on the ground floor and will own part of the operations. We allege that the defendants took advantage of investors’ appetite for these investments and fraudulently raised millions of dollars by lying about their business.”

The SEC’s complaint, filed in U.S. District Court for the Northern District of Texas, seeks permanent injunctions, return of allegedly ill-gotten gains with interest, and civil money penalties.

Without admitting or denying the allegations, Bitqyck, Bise, and Mendez consented to final judgments agreeing to all the injunctive relief.

Bitqyck also consented to an order requiring that it pay disgorgement, prejudgment interest and a civil penalty of $8,375,617.  Bise and Mendez consented to the entry of an order that they each pay disgorgement, prejudgment interest and a civil penalty of $890,254 and $850,022, respectively.

 


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Colu Gives ICO Money Back: Apparently, Companies Can Do the Right Thing Without a Regulator Telling Them What to Do

Colu Group Offers to Buy Back ALL Tokens Issued in ICO

The key role and responsibility of financial regulators is to identify and correct market deficiencies that have an adverse effect on investors and end-clients. For this reason, regulators are especially sensitive to corporate conduct that is intended to solicit investments from the public and enrich the corporation’s bank account. A good example is the reaction of many financial regulators around the world to the public sale of digital tokens, or initial coin offerings (ICOs) during the second half of 2017 and 2018.

As ICOs became increasingly popular as a mechanism for companies to raise money without going through the traditional securities-offering process (and supervision that comes with it). Regulators felt compelled to step in and take a stand.

The US Securities and Exchange Commission (SEC) took a leading role in classifying ICOs as unregistered securities offerings, and through a series of public announcements and aggressive enforcement actions managed to suppress ICOs in the United States.

However, other countries and other regulators took different positions; some – like Gibraltar, Malta, and Switzerland – encouraged ICOs, and some – like the United Kingdom – took a more neutral position, recognizing that ICOs may be offerings of securities, but depending on the circumstances, may also not fall under securities regulation at all.

Interestingly, in mid-August 2019, an unusual event occurred – one of the companies that raised money during the “ICO boom” – Colu DLT – had announced its intention to purchase the tokens it sold during the public ICO in early 2018 according to their original value in Ethereum at the time of the ICO. This mechanism guarantees that Colu’s token purchasers will not be harmed by the drop in those token’s value that had occurred over time. More interestingly is the reason for the token repurchase plan.

Colu decides to table its blockchain endeavors

According to Colu’s announcement, the use of cryptocurrencies has become “a barrier towards working with municipalities and other partners, which have become the main focus of [Colu’s] work”.

In fact, the company – that operates non-crypto electronic wallets, enabling the creation of “city currencies” – has decided to table its blockchain endeavors, and in this context intends to repurchase the tokens and then digitally “burn” them, so that they become worthless.

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It is hard to imagine an argument against the fairness of this move.

Colu thought that it made sense to develop a blockchain-based product, it later decided to abandon this plan, so it refunded the public purchasers of the digital tokens it sold and did so at their original value at the time of the sale.

Colu didn’t have to undergo this repurchase process, and no regulator forced it to do so. Admittedly, they probably had good business reasons to do so, and the fact that it is also the fair and right thing to do – doesn’t hurt. And this is why I believe there is an important lesson to be learned here; one that regulators should pay attention to.

As mentioned above, financial regulation is intended to address market deficiencies. When they occur – regulators are called into action. The SEC and other regulators felt that unregulated ICOs were an example of such a market deficiency.

Indeed, some of the companies that offered tokens in an ICO had no intention of developing a real product and were attempting to raise quick and easy money by defrauding the public. But that is not a market deficiency, it is just plain old wrongdoing, which should be addressed by enforcement actions, not regulation.

Colu’s token repurchase announcement demonstrates just that. Sometimes, the market doesn’t need to be fixed, and companies don’t always need a regulator in order to tell them to do the right thing. If anything, regulators should publicly announce their support of Colu’s move, and use the Colu example in order to incentivize other companies in similar situations to act in the same way.

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Dr. Zvi Gabbay is a partner and the Head of the Capital Markets and Financial Regulation Department at the Barnea & Co. law firm. For over more than 18 years of practice in the fields of financial regulations and enforcement, Zvi’s vast experience includes roles as Head of Enforcement and member of the management of the Israel Securities Authority, as a lawyer in the New York office of Skadden, Arps, Slate, Meagher & Flom, as a prosecutor in the Tel-Aviv District Attorney’s office, as a partner in a major law firm in Israel and as a founding partner of a boutique capital market firm.

Paragon Coin Starts Processing SEC Mandated Refunds for Money Raised via ICO

Paragon, a Cannabis-focused company that completed an initial coin offering (ICO) that was determined to be an offering of unregistered securities by the Securities and Exchange Commission (SEC), has begun accepting applications for investor refunds.

According to a recent update on the Paragon site, the company is now entering the mandated Claim Period. All eligible Paragon Coins (PRG) purchasers wanting their money back may complete a form as required by the recission order. The process has been delayed several times but now it appears it is a go. The claims period is said to expire on November 21, 2019.

According to CoinmarketCap, PRG currently trades at about $0.03 a token. Its all-time high is stated at around $10 per token. During January 2019, after the SEC had taken action against the company, PRG oddly jumped to the 52 week high on YoBit.

As was previously reported, Paragon accepted money from approximately 8,323 investors, including individuals in the United States, and raised about $12 million. The ICO was completed post-DAO report in late 2017 and thus the organizers ignored the blunt warning from the SEC that ICOs were, in fact, securities.

Paragon’s settlement with the SEC, included a requirement to:

  • return funds to harmed investors
  • register the tokens as securities under the Securities Exchange Act of 1934
  • file periodic reports with the Securities and Exchange Commission (SEC) for at least one year
  • pay $250 000 in penalties

Earlier this month, the SEC forwarded a letter to Jessica VerSteeg Lavrov, President ParagonCoin Limited, to an address in Gibraltar.

In the letter, the SEC Division of Corporate Finance expressed the agency’s frustration with the prior delays threatening to “terminate our review and will take further steps as we deem appropriate.”

“Among other things, we may decide to release publicly, through the agency’s EDGAR system, all correspondence, including this letter, relating to the review of your filing, consistent with the staff’s decision to publicly release comment and response letters relating to disclosure filings it has reviewed.”

It appears the threat to disclose all correspondence has had its desired effect.

Recently, VerSteeg deleted some of her social media accounts but Paragon’s remain active.

Now the question is if Paragon will have sufficient funds to pay back any investors who may want their money back.

In the mandated Form 10 filed with the SEC in March 2019, Paragon reported the following:

“We have historically experienced recurring losses and negative cash flows from operations. At December 31, 2018, we had a working capital deficit of $14,863,257 which included cash and cash equivalents of $36,559. As of December 31, 2018, we held cryptocurrency with a carrying value of $54,106.”


Paragon Coin Claims Process Information

PARAGON COIN has entered Claim Period listed below is the Claim Form.

https://paragoncoin.com/Claim_Form.pdf

All eligible PRG token purchasers wishing to do so can apply for a resciss by filing out the attached form and mailing it to

ParagonCoin, Inc

P.O. Box 93219

Los Angeles, CA 90093

Please note that in order for your Claim Form to be processed, it must be received at the address above on or before November 21, 2019    VIA REGISTERED MAIL,   along with all of the supporting documentation.

Claimants will receive a written response within three months of the expiration date.

Unauthorized Telegram Token Secondary Market Transferring Risk

Accredited investors who bought into Telegram’s $1.7 billion USD ICO (initial coin offering) in February and March 2018 have been selling the tokens in secondary markets without authorization, meaning buyers could “end up with nothing,” Coindesk reports.

According to a GRAM token purchase agreement obtained by the outlet, first-round buyers of GRAMs agreed to observe a “Restricted Period” during which they would not, “offer, pledge, sell, contract to sell…encumber or dispose of their tokens…directly and indirectly.”

Selling, “any securities convertible into or exercisable or exchangeable for the investment contract,” is also forbidden in the purchase agreement, which was drafted by major American law firm Skadden, Arps, Slate, Meagher & Flom LLP.

Telegram prohibited the trading of GRAMs until the blockchain it is building for their circulation, Telegram Open Network (TON), has been completed, and according to a source to Coindesk, “Telegram was the first big project that legally prohibited investors from selling their allocation.”

The prohibition may have been established to keep the company on the right side of regulators, who have become increasingly active in response the ICO boom of 2017.

Researcher Larry Cermak noted in a recent thread of tweets that, currently, “The median ICO return in terms of USD is -87% and constantly dropping.”

The contractual prohibition on resale fo GRAM tokens hasn’t stopped first round investors, who bought the tokens at $0.37 USD in the first round and $1.33 in the second, from “gifting” tokens to friends or otherwise transferring them.

The Japanese crypto exchange Liquid, in partnership with “GRAM Asia,” sold GRAM tokens to the public in July of this year for $4 each.

Telegram has stated that GRAM Asia is not an official partner.

Crowdfund Insider and other outlets covered the sale, and none of those reports mentioned the resale prohibition in the original GRAM token Purchase Agreement, suggesting that Liquid may not have been explicit about informing investors or the press about the prohibition- and the risks.

Telegram will not be issuing GRAMs until the TON blockchain is operational, meaning the tokens being sold by Liquid/GRAM Asia are also not available for custody by purchasers until they are transferred to Liquid et al and then to buyers- if they are indeed transferred.

Liquid makes a brief reference to GRAM token trading restrictions on the website page dedicated to the GRAM sale:

“The tokens being sold will not be released until after TON goes live (mainnet release), in accordance with the delivery schedule. Purchasers will not be able to transfer, withdraw, or trade the Grams before they are released.”

…but does tell investors that the tokens could be nullified.

Tokens sold by GRAM Asia and Liquid are not available to investors in Japan or the US.

According to Coindesk:

“Purchasing tokens this way might be risky, investors warn, as Telegram specifically prohibited investors from re-selling their allocations under penalty of terminating the purchase contract.”

SEC Settles with Blockchain based Health Care Platform SimplyVital Health in Regards to Initial Coin Offering

The Securities and Exchange Commission (SEC) filed an Administrative Proceeding earlier this week regarding an initial coin offering (ICO) affiliated with SimplyVital Health – a company that pursued an ICO in late 2017 and early 2018. The SEC claims that SimplyVital sold unregistered securities. SimplyVital apparently sold “Health Cash” tokens (HLTH) in a crowdfunding round. The plan was to create 200 million HLTH tokens with a presale offering 40 million tokens to investors in a SAFT.

The SEC has now settled with the company.

A document posted on the SimplyVital Health website states the settlement with the SEC now allows management to “refocus on developing blockchain-based solutions to emerging value-based healthcare programs.”

CEO Kat Kuzmeskas stated:

“We are pleased to put this matter behind us and are looking forward to the next stage in SVH’s evolution. Recently, SVH launched its “sana” services design with the goal of enabling physicians participating in the Centers for Medicare and Medicaid Services value-based care program to provide improved care while minimizing financial penalties.”

According to the SEC filing:

In total, from September 25, 2017, to April 3, 2018, SimplyVital raised more than 15,200 ETH (equivalent to approximately $6.3 million USD as of April 3, 2018) from 52 individuals or ICO pools who invested through the company’s pre-sale. Of the more than 15,200 ETH raised, at least 13,800 ETH (more than $5.2 million USD) came from purchasers with whom the company had not taken reasonable steps to verify accredited investor status.”

In January of 2019, SimplyVital announced it would not issue the HLTH tokens and all funds would be returned to investors. This decision came following outreach from the SEC staff.

The SEC reports that substantially all of SimplyVital’s assets have been returned to investors.

Importantly, the SEC has decided not to impose a civil penalty, in light of the actions taken by the firm.

This is not the first time the SEC has pursued an enforcement action by an ICO issuer with many prior settlements including a financial penalty and, in some cases, a requirement to file registration statements – a costly pursuit.

It is interesting to note the relatively mild actions by the SEC for a post- DAO report offering.

The seminal DAO report has been considered a line in the sand for ICO issuers with the Commission mainly pursuing post-DAO offerings or blatant acts of fraud. The DAO report was published by the SEC on July 25, 2017.

This approach by the SEC Enforcement Division may encourage other ICO issuers to proactively contact the Commission and possibly settle on similar terms.

The US ICO industry has largely accepted that almost all token offerings are securities and thus must adhere to existing securities law. ICOs have morphed into security token offerings (STOs) filed under one of three securities exemptions (Reg A+, Reg D, Reg CF). Some industry participants hope that Congress will take legislative action to create a safe harbor for utility token offerings similar to what is occurring in other global jurisdictions.

Several digital asset issuers have received No-Action letters regarding the issuance of a digital asset following direct communication with SEC staff. Most recently, Pocketful of Quarters received a No-Action Letter for the issuance of a token which was not deemed to be a security.


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SEC Freezes $8 Million from Alleged Bogus ICO & Manipulation Fraud Perpetrated by Reggie Middleton [u]

The Securities and Exchange Commission (SEC) Enforcement Division has announced charges against Reginald “Reggie” Middleton who allegedly engaged in fraud related to a digital securities offering. The courts have granted an emergency freeze on $8 million in assets of a reported $14.8 million that Middleton allegedly raised in an initial coin offering (ICO) which took place from 2017 into 2018.

According to the SEC complaint, Middleton is a self-described “financial guru” who controls two entities: Veritaseum, Inc. and Veritaseum, LLC. The SEC states that Middleton “sold securities called “VERI” tokens,” inducing retail investors to invest based on “multiple material misrepresentations and omissions.”

The SEC cites a promotional brochure by Middleton that claimed:

“Veritaseum, Inc.’s “Potential Market LITERALLY Boggles the Mind!” in that “We Get a Potential Market of . . . $225,520,000,000,” which could yield “ dollars in annual cashflow [sic],” such that “UltraCoin is valued over $20,000,000,000, ”

Another brochure was said to tout Veritaseum’s access to “$1.635+ Quadrillion – Literally the Market of All Money…”

The SEC complaint states that to skirt the federal securities laws’ registration requirements, Middleton attempted to refashion VERI variously as “pre-paid fees” or “software,” and likened them to gift cards.

The SEC charges Middleton and Veritaseum with violating the registration and antifraud provisions of the U.S. federal securities laws,

The SEC also alleges that Middleton manipulated the price of VERI on an “unregistered digital asset platform.” Middleton allegedly moved a significant amount of funds raised to his personal account.

To quote the SEC Complaint:

“… after the ICO phase, Middleton placed a series of secret, manipulative trades in VERI on a digital asset platform, artificially increasing VERI’s price by approximately 315% during just one day of trading. He then touted these price increases and returns to VERI holders, stating, for example, that because VERI was “up 33.51x from its April 25th initial sales price [,] [s]ome prescient folk are quite happy.” Middleton also misappropriated for his own personal and undisclosed use at least $520,000 of the amounts raised in the Offering.”

Of note, the SEC states that an unnamed “public figure,” aged 63 and based in Los Angeles, loaned Middleton $1 million in June 2017.

On July 31, 2019, the SEC claims that Middleton moved $2 million in remaining proceeds from a “blockchain address they controlled into other addresses, and used a portion of those funds to purchase more precious metals.”

Commission staff claim they requested, through counsel, that Defendants voluntarily agree not to engage in further dissipation of the Offering proceeds, including through the purchase of precious metals. Defendants, through counsel, declined the staff’s request.

“After learning about Middleton’s transfer of funds, we took quick action to prevent the further dissipation of investor assets,” stated Marc P. Berger, Director of the SEC’s New York Regional Office.  “Whether in digital currency or plain cash, we will act to protect investor assets and to pursue fraud and manipulation in our securities markets.”

The SEC’s complaint charges Middleton and Veritaseum with violating the registration and antifraud provisions of the U.S. federal securities laws, and Middleton with additionally violating the antifraud provisions on the basis of his manipulative trading.  The complaint seeks permanent injunctions, disgorgement plus interest and penalties, and a bar from offering digital securities.  For Middleton, the SEC also seeks an officer-and-director bar.

The Commission’s investigation was conducted by Jorge G. Tenreiro and Victor Suthammanont of the New York Regional Office, assisted by Roseann Daniello, a staff accountant in the New York Regional Office, John O. Enright of the Cyber Unit, and IT Forensics staff Ken Zavos and Olga Cruz-Ortiz.  The case is being supervised by Lara Shalov Mehraban, Associate Regional Director of the New York Regional Office.  The SEC’s litigation will be led by Mr. Tenreiro and Mr. Suthammanont.

Update: Middleton’s Attorney, David Kornblau, Partner, Covington & Burling, has provided the following statement regarding the SEC enforcement action:

“This is a meritless action by the SEC and we look forward to proving that in court. Mr. Middleton and Veritaseum have acted appropriately and been truthful about the company’s innovative software platform. While disappointed by the court’s decision to temporarily freeze the company’s assets, we are pleased the judge rejected the SEC’s request to freeze Mr. Middleton’s personal assets.”


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Nova Scotia Issues Investor Alert Against “aGifttoken” ICO Sale

The Securities Commission in the Canadian province of Nova Scotia has issued an alert warning local investors to be wary of a crypto project/ICO sale called aGiftoken, which is not licensed to sell securities in the region.

aGifttoken is now selling a 10-20 million AGT tokens for the equivalent of one dollar each (in ethers) in an ICO (initial coin offering) sale that started July 5th.

The tokens are purportedly Ethereum compatible ERC-20 tokens being sold for ethers, the “currency” native to the Ethereum blockchain (one ETH currently trades for $228 USD).

The Securities Commission of Nova Scotia is warning the public that this project appears to emanate from Bucharest, Romania.

One of the risks in crypto markets is that tokens can be easily circulated across jurisdictions, but enforcing investor rights across borders is considerably harder:

“The Commission urges Nova Scotians to exercise extreme caution when dealing with firms that are not registered in Nova Scotia. It is illegal to solicit investments in Nova Scotia without registering with the Commission and complying with Nova Scotia securities laws. To see if a company or person is registered, you can check the Canadian Securities Administrators’ National Registration Search.”

Stephanie Atkinson, Acting Director of Enforcement with the Commission, says that a registration search should standard practice. “Always take the time to check registration and understand the risks and costs involved with your investments.”

aGifttoken’s landing page includes the same vague technobabble and sentimental rhetoric common to 2016/2017 “ICO mania” marketing materials.

For example:

“Offering people gifts is one of the most wonderful traditions, as it shows generosity and caring.”

“aGifttoken is an exceptional system that is created to rebrand gifting. It offers a method of cultivating trust between a gift sender and a gift receiver with the aid of Blockchain technology.”

“Our vision is to create a world in which you and your friends can celebrate the most important events regardless the geographical barriers. By using our platform we enhance the art of ensuring trust and confidence that makes gift senders to contribute more than initial estimated to the community they belong.”

As a member of the North American Securities Administrators Association (NASAA), the Nova Scotia Securities Commission is contributing to Operation Cryptosweep, a transcontinental, multi-agency effort to combat ICO fraud.

That operation has resulted in, “130 new investigations of Initial Coin Offerings (ICOs) and cryptocurrency-related investment products…(and) 35 enforcement actions.”

France Perspective: Philippe Dardier of Avolta Partners Discusses Blockchain.io ICO

France is a country that is seeking to position itself as a jurisdiction of preference when it comes to blockchain technology and the issuance of digital assets. Blockchain innovation has been aided by vocal government support and new legislation signed into law that allows for digital assets which are not regulated as securities or currency. The Loi Pacte (or Pacte Law) is unique in Europe as it provides bespoke rules for crypto issuance and trading in a major European economy.

The Autorité des Marchés Financiers (AFM), the French securities regulator, has prepared a portion of their website explaining the new framework for initial coin offerings (ICOs). This “new regime” for crypto assets in France gives issuers the option to apply for a “visa” to pursue an offering. Issuers must meet the following requirements:

  • the obligation for the token issuer to be incorporated in the form of a legal person established or registered in France;
  • the provision of an information document to provide all relevant information on the offer of tokens, the funded project, and the company;
  • the establishment of a system to monitor and safeguard the assets collected during the offer;
  • compliance with the rules in force in the fight against money laundering and the financing of terrorism (AML/KYC).

If the AMF approves of the application the issuer receives a visa. If an issuer does not have a visa, they may still pursue an ICO without regulatory approval. The one caveat is that issuers without a visa may not promote the ICO.

Regarding “digital asset service providers” (PSAN), such as crypto exchanges, these entities may receive an “optional” license from the AMF as well.

For purchasers of these digital assets, it is buyer beware. The AMF has published an explanatory page of what an investor should know. A white list (still empty) is posted on the AMF site to indicate which ICO issuers have been approved and received a visa.

It is arguable that France has created one of the most permissive regimes for the issuance and trading of digital assets which are not deemed to be securities.

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At the end of 2018, Blockchain.io completed an ICO raising an undisclosed sum of funding. Blockchain.io (not to be misconstrued with Blockchain.com) is a centralized crypto exchange that was created by Bitcoin to Fiat platform Paymium. While completing the ICO prior to the Loi Pacte, Blockchain.io is a fan of the French approach. According to their website:

“We are great supporters of the regulatory initiatives taken by the French government and the AMF, whom we meet with frequently. Appropriate regulations will attract greater institutional investments into the ecosystem. Our ICO services also target institutions and large corporations that are asked to be compliant under regulations. We have actively participated to many Blockchain Forums addressing regulation. Our goal is to become a trusted trading hub in Europe and beyond.”

Blockchain.io/Paymium is not without its detractors. Paymium, which has been around since 2011, was the target of a hack back in 2013. But the platform is quick to note that they have been hack free ever since. And Blockchain.com is not too pleased with the name of Blockchain.io, as one may imagine. But beyond all of that, Blockchain.io, crypto to crypto exchange, and Paymium, a fiat on-ramp, is looking to build a primary issuance and digital asset trading platform that leads in Europe.

Blockchain.io caught our attention due to the involvement of boutique investment bank Avolta Partners. Avolta has been vocal in promoting a self-regulatory environment for ICOs, seeing digital assets as a unique opportunity to boost continental innovation and entrepreneurship. Avolta has been an advisor on both traditional and crypto offerings.

Crowdfund Insider recently spoke with Avolta Senior Partner Philippe Dardier, a long-time supporter of online capital formation and founding member of the European Crowdfunding Network (ECN). Avolta advised Blockchain.io on its ICO so we asked Dardier what type of support did they provide:

“The guidance provided by Avolta Partners, Europe’s premier tech M&A and fundraising shop, ranged from : helping assess and engaging the investors , funds, Whales, family offices …; regulatory recommendations to ensure the ICO is compliant with the geographies where the ICO was marketed on a global level; recommending new advisors (in Asia, Estonia, UK, etc …); assistance in the planning of the marketing campaign; contributing to the white paper; and finally day to day guidance with investors and member of the crypto ecosystem as well the newcomers from the old Fiat finance world,” explained Dardier

He said that  Blockchain.io completed the ICO and considered it a significant success with over 8 000 investors ranging from funds to individuals in over 100 countries. “Blockchain.io does not wish to communicate on its numbers,” Dardier shared.

The context and the ICO must be put into perspective, he explained, as this is one of the few successful ICOs over the course of the last six months of 2018.

Dardier said the Entrepreneur/founder, Pierre Noizat, is one of the finest cryptographers in Europe. Noizat launched the first continuous crypto to fiat gateway s in Europe in 2011.

“The reception by the community was good due to the brand awareness of Blockchain.io,” Dardier said.

Given that France has enacted rules to encourage digital asset offerings. we asked Dardier to share his opinion as to how he sees the market evolving.

“The underlying tone of the government and French authorities towards business and the Blockchain technologies has been extremely positive, over the last two years,” Dardier stated. “The government and members of parliament have been pushing forward interesting legal frameworks, initiatives (such as those started by the CDC -Caisse des Depots et Consignations– the French Sovereign fund) and are encouraging regulators to tackle the topic in a business-friendly mode.”

Dardier pointe to the fact that French President Macron, while Minister of Finance in 2015, passed legislation to enable crowdfunded securities to be settled and registered on a decentralized Blockchain, so the topic is enthusiastically followed at the highest level.

Asked about the challenge to remain compliant within jurisdictions outside France and Dardier said that European countries both inside and outside the EU are moving forward with creative new approaches for security tokens and digital assets in general. Switzerland is, of course, top of mind:

Tokenisation seems to be catching on across Europe for underlying assets in Real estate and other securities. Blockchain.io is one of the premier actors in this space to both list trade and advise in the crypto asset world, he explained.

So is Avolta receiving much interest from non-French issuers? And what about issuers from outside the EU?

“At this stage, the market is a little quieter than in 2018, and that’s putting it euphemistically,” admitted Dardier. “EU countries are putting a determined effort into harmonizing rules and communicating amongst each other to ensure a more representative pan EU legislation is in Place. At the outset of the June European elections, the new sitting parliament will in all probability enact legislation or parts of it. The EU commission is extremely positive on ICO’s and other countries in the EU especially France, Malta, and the Baltics [which] are embracing this quickly.”

The slower issuance environment could also be due to the new FAFT rules that are now in place. Rules that impact “virtual asset service providers,” that France will certainly support.

So will the EU match the French rules? Can we expect harmonization based on the French ecosystem?

“As usual in the EU you will have national actors (there are 27 member countries) each promoting their view and the EU commission providing a variety of proposals which will then lead to a common EU legislation on the topic. It’s still early days, Blockchain.io has been very frequently consulted due to its long experience in this space and its robust and tested technology, on all these topics by the French regulators and government.”

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