Bitcoin Store: UK Citizen and Fraudster Renwick Haddow Barred by SEC

Renwick Haddow, a UK citizen who allegedly perpetrated multiple frauds, has received additional sanctions from the Securities and Exchange Commission (SEC). Haddow apparently also adopted the alias “Jonathan Black.”

Haddow was previously disqualified as a director of any United Kingdom company for eight years, and was sued by the UK Financial Conduct Authority for operating investment schemes that lost investors substantially all of their money.

According to a filing from last week, Haddow has been barred by the SEC from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and barred from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer.

In 2017, the SEC filed fraud charges against Haddow, who was living in New York, alleging he as the “clandestine founder” and creator of a Bitcoin platform and a chain of co-working spaces located in former bars and restaurants. The SEC said that Haddow fleeced investors while hiding his checkered past in the UK. There were several allegedly fake companies; Bar Works Inc., 7th Avenue. and the Bitcoin Store Inc. The SEC said that between January 2015 and June 2017, Haddow, through Bar Works, 7th Avenue, and Bitcoin Store, collectively raised over $37 million from investors. Haddow also founded and controlled the unregistered broker-dealer, InCrowd Equity, Inc. which he used along with other marketing platforms to promote and sell securities. The Bitcoin Store as apparently a platform for users to trade and hold Bitcoin.

In 2018, Haddow was extradited to the United States from Morocco by the US Department of Justice. Haddow has been the target of a concurrent criminal prosecution by the US Department of Justice.

On May 8, 2019, Haddow pled guilty to two counts of conspiracy to commit wire fraud and two counts of wire fraud. On September 10, 2019, a final judgment was entered by consent against Haddow.

According to a report by World Policy posted in 2015, Haddow allegedly ran a scam in the UK where he “siphoned a conservative estimate of $180 million using a number of fabricated alternative investments.”

SEC Schedules Conference on “The State of Our Securities Markets”

The US Securities and Exchange Commission (SEC) has scheduled a conference tackling the topic of “The State of Our Securities Markets.” The event, which is open to the public, will take place on December 4th, 2019 at SEC HQ on F Street in Washington, DC. The SEC is currently accepting registrations here.

The precise agenda will be published at a later date but the Commission has posted a list of participants including SEC Chairman Jay Clayton, Risk Analysis Director S.P. Kothari, and Division of Investment Management Director Dalia Blass.

The “outside experts” include:

  • Tobias Adrian, Financial Counsellor and Director, Monetary and Capital Markets Department, International Monetary Fund
  • Gary Cohn, former Director of the National Economic Council
  • Nate Goldstein, Assistant Chief, Economic Analysis Group, Antitrust Division, U.S. Department of Justice
  • Glenn Hutchins, Co-founder, Silver Lake Partners
  • Marko Kolanovic, Global Head of Macro Quantitative and Derivatives Research, J.P. Morgan
  • Jennifer Marietta-Westberg, Principal, Cornerstone Research
  • Tara Muller, Head of Off-Exchange Liquidity, Virtu Financial
  • Craig Phillips, former Counselor to the Secretary of the U.S. Department of the Treasury
  • Justin Schack, Managing Director and Partner, Rosenblatt Securities
  • Howard Shelanski, Partner, Davis Polk & Wardwell LLP; Professor of Law, Georgetown University; former Administrator of the White House Office of Information and Regulatory Affairs; former Director, Bureau of Economics, Federal Trade Commission
  • Gillian Tett, Chair of Editorial Board and Editor-at-large, Financial Times

In recent years, private markets have boomed while public markets have bounced along. Some industry followers describe initial public offerings more of an exit opportunity than a point when retail investors can join along. Examples such as the Wework debacle do not help the narrative.

Meanwhile, Fintech and digitization of all financial services have fueled a boom in innovation. This includes online capital formation.

The SEC is currently reviewing the exemption ecosystem, as described by a concept release, and considering potential changes to current rules. Expect some of the discourse to tackle the concept release topics.

The event will also be live-streamed on the SEC website.

ICO Issuers that Sold Unregistered Securities May Not Be Able to Pay Penalties Assessed by the SEC. What Happens Now?

Last week, Crowdfund Insider referred to several Securities and Exchange Commission (SEC) enforcement actions that addressed the sale of unregistered securities by issuers of initial coin offerings (ICOs). Penalties assessed by the SEC are now coming due for several prominent enforcement actions brought by the SEC. Yet, questions remain as to whether, or not, many of these issuers have the resources to cover these costs – much less any refunds driven by a recission requirement.

A report in WSJ.com mentioned the Gladius Network LLC settlement where the company self-reported its alleged transgressions. This team received a slap on the wrist for its approach. Others have not been so fortunate.

CI received a note from Philip Moustakis commenting on several of the ICO enforcement actions.  Moustakis is a former senior counsel at the SEC who investigated and litigated the SEC’s first-ever Bitcoin-related enforcement action. He is also an early member of the SEC’s Cyber Unit working closely on distributed ledger technology issues. Currently, Moustakis is counsel at Seward & Kissel LLP.

Moustakis explained that in announcing its settlement with Gladius, the SEC heralded the fact that the company self-reported its ICO, took remedial steps, and cooperated with the SEC in its investigation as reasons a penalty was not imposed.  Just a few months prior, the SEC imposed a $250,000 penalty against both Paragon Coin, Inc. and AirFox for unregistered ICOs of comparable size. All three companies in their respective settlements with the SEC agreed to return funds to investors who purchased tokens in the ICO and requested a refund.

Because there were so many ICOs of equal or greater size during the 2017-2018 ICO craze that were cut-and-dried securities offerings, Moustakis said he had expected to see a self-reporting initiative of some kind following the Gladius settlement.

“… An initiative in which the SEC offered ICO promoters who self-reported, came into compliance, and offered refunds to investors who purchased in the ICO would receive similar no-penalty settlements.  Now we may be seeing why that has not happened,” explained Moustakis.  “As a practical matter, it may not be feasible for many firms to come into compliance.  On the whole, token values have declined since the craze, meaning many investors will opt to put their tokens back for a refund.  And with many of the blockchain-based platforms linked to token offerings still undeveloped or in development, the money may not be there.”

Moustakis said that it remains to be seen whether the apparent difficulties some of these companies have with complying with their settlement agreements will color the SEC’s approach in future cases.

We contacted Moustakis with several more questions regarding what happens when a settlement with the SEC cannot be paid.

“The SEC may agree to provide a respondent with more time, which is what I would expect them to do, so long as the respondent is endeavoring in good faith to meet its obligations under the settlement,” Moustakis stated. “At some point, if the SEC determines the respondent is not endeavoring in good faith to do what it agreed to do, the SEC may seek to unwind the settlement and proceed with its prosecution.  It is also possible that the delay here is attributable to investors having some difficulty with the claims processes created in connection with the settlements, which I would also expect the SEC to work through.”

Regarding rescission offers, if an issuer cannot meet the demand of investors asking for their money back – what happens? Does the company simply file for bankruptcy?

Moustakis explained:

“Strictly speaking, the settlements do not provide for the ICO issuers to make rescission offers – which can be a lengthy and costly process, requiring additional filings – but rather an agreement to return funds to investors who purchased tokens in the ICOs and want to put those tokens back to the issuers for a refund.  It is for the SEC to enforce those settlements.  But civil suits may also follow.  Whether a suit would drive the issuer into bankruptcy would depend on the strength of the plaintiffs’ claims, the economics involved in meeting plaintiffs’ demands, and the financial condition of the company.”

Another attorney had indicated, in his opinion, that it was not practical for the SEC to assess penalties when it is pretty clear they will never be paid. Is there an alternative?

“The SEC can enter into a settlement with a respondent that does not include a penalty if the respondent can demonstrate he or she cannot pay.  However, the SEC is not in the habit of waiving disgorgement, that is, that the respondent gives up the proceeds of any securities law violations committed, in the SEC’s view,” shared Moustakis. “But here the issue appears to be that the respondents cannot follow through on undertakings to which they agreed as a condition of their settlements, namely to refund investors who would prefer to have their money back rather than keep the tokens they purchased in the respective ICOs.”

In retrospect, would there have been a better approach by regulators to have better managed the ICO craze? The DAO report appears insufficient in hindsight.

Moustakis said, that in his view, the DAO Report did just what it was intended to do:

“… it put the industry on notice that under a traditional securities law analysis, on the whole, ICOs constituted securities transactions.  There may have been those in the industry unwilling to hear that or not getting the greatest advice on the issue.  To that end, more aggressive prosecution following the report may have given the report’s message greater teeth, but the SEC has a really smart team doing this work and, often, it comes down to resources.”

[easy-tweet tweet=”The DAO Report put the industry on notice that under a traditional securities law analysis … ICOs constituted securities transactions. There may have been those in the industry unwilling to hear that.. ” template=”light”]

Payments Software Firm Bill.com Is Planning to Raise $100 Million via an IPO

Payment software firm Bill.com is planning to raise $100 million through an initial public offering (IPO), according to a recent filing with the US Securities and Exchange Commission (SEC).

Established in 2006 by PayCycle co-founder René Lacerte, Bill.com provides cloud-based business payments and offers a software platform that’s designed specifically for the SMB market. Bill.com’s clients include Gusto, Thumbtack, Dialpad, and several accounting companies.

The California-headquartered firm has raised around $347 million since its launch. In April 2019, Bill.com raised $80 million via an investment round led by Franklin Templeton Investments, which made it a unicorn. Temasek Holdings and DCM Ventures also took part in the round.

Bill.com’s investors also include MasterCard, Fidelity, Silicon Valley Bank and Bank of America.

During its April 2019 fundraise, Bill.com’s management noted that the platform had over three million members who were either paying other merchants or were receiving payments via Bill.com’s platform. The company also revealed at the time that it handled over $60 billion in yearly payments. According to Bill.com’s SEC filing, the firm has more than 81,000 customers that are using its platform “to manage their financial workflows and process their payments.”

Goldman Sachs, BofA Securities, Jeffries and William Blair have been listed as underwriters for Bill.com’s IPO. Pricing terms for the public offering have not been shared publicly. The firm’s shares will be tradable on the New York Stock Exchange (NYSE) under the ticker “BILL.”

During Q3 2019, Bill.com generated around $35.2 million in revenue, which is notably a 57% year-over-year growth when compared to $22.4 million in revenue for the same time period last year. Bill.com’s total revenue has increased 71% between Q3 2017 and Q3 2018.

The company has significantly increased its sales and marketing expenditure. It spent $32.3 million on marketing during Q3 2019.

Bill.com reported around $5.7 million in total losses during Q3 2019, which is up 544% from the same time period last year.

Final Judgement: VERI ICO Ordered to Pay $9.5 Million Penalty for Violation of Securities Law

The Securities and Exchange Commission (SEC) has announced the final judgment in regards to the Veri initial coin offering (ICO) which was deemed to be sales of unregistered securities. Veritaseum, Inc. and Veritaseum, LLC  along with Reginald Middleton have been ordered to pay a $9.5 million penalty. The defendants also agreed to an injunction against future violations of the antifraud provisions of the federal securities laws.

In August of 2019, the SEC announced charges against Middleton and his company. The SEC stated Middleton and his firm “sold securities called “VERI” tokens,” inducing retail investors to invest based on “multiple material misrepresentations and omissions.”

At that time, the courts granted an emergency freeze on $8 million in assets of a reported $14.8 million that Middleton allegedly raised in the ICO which took place from 2017 into 2018. Middleton’s Attorney, David Kornblau, a Partner at Covington & Burling, labled the action meritless.

The SEC said the offering included misrepresentations about the potential profitability and viability of Veritaseum’s purported operations, the use of funds raised in the VERI ICO, and the amount of funds raised in the VERI ICO. The SEC also alleged that Middleton manipulated the price and volume of VERI on secondary digital-asset trading platforms during the VERI ICO.

On November 1, 2019, the U.S. District Court for the Eastern District of New York, entered a final judgment against Middleton and Veritaseum on their consent. Pursuant to the final judgment, the Defendants, without admitting or denying the allegations in the SEC’s complaint, are enjoined from further violations of registration provisions, and the antifraud provisions of the Securities Act. Additionally, the  defendants are enjoined from participating in any digital-securities offerings.

Middleton is also enjoined from further violations of the market manipulation provision of the Exchange Act.

According to the SEC, all Defendants are ordered to disgorge $7,891,600 in ill-gotten gains from the VERI ICO plus $582,535 in prejudgment interest, and Middleton is ordered to pay a $1,000,000 civil penalty.

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

The final judgment establishes a Fair Fund pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002 or the “Veritaseum Fair Fund”, and appoints Holland & Knight LLP as distribution agent for the Veritaseum Fair Fund to develop and propose a plan for the distribution of collected assets to victims of Defendants’ fraud.

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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Crypto Mom: SEC Commissioner Hester Peirce Says Lack of Regulatory Framework has Harmed Digital Asset Innovation

SEC Commissioner Hester Peirce delivered a speech, entitled Broken Windows, addressing SEC enforcement actions earlier this week. Peirce reviewed the topic in advance of the annual report on such actions. The SEC Division of Enforcement is the largest Division within the Commission. According to the report published on Wednesday, The SEC dealt with a diverse mix of 862 enforcement actions during the last fiscal period.” These actions also included initial coin offerings (ICOs) and Digital Assets – an emerging area of interesting at the SEC.

Peirce, while laudatory of the effort of the Enforcement Division, cautioned against drawing grand conclusions from the number of enforcement actions. Regarding the heightened scrutiny being applied to digital assets and initial coin offerings, Peirce was critical of the approach the SEC has taken. The Commissioner aligns with a good number of digital asset industry insiders that prefer bright-line rules as opposed to regulation by enforcement and the occasional no-action letter.

To quote the Commissioner, who has been labeled by some as the “Crypto Mom” due to her willingness to approach digital assets with an open mind, Peirce stated:

“Given my “Crypto Mom” nickname, you had to expect one of my examples to be crypto-related, so here it is. I am concerned about how the SEC has regulated this space, because I believe our lack of a workable regulatory framework has hindered innovation and growth. The only guidance out of the SEC is a parade of enforcement actions and a set of staff guidance documents and staff no-action letters.” [emphasis added]

[easy-tweet tweet=”I believe our lack of a workable regulatory framework has hindered innovation and growth #CryptoMom” template=”light”]

While the Commission has eked out periodic guidance when it comes to crypto offerings, it has been insufficient Peirce claimed:

“For example, the SEC’s web page “Spotlight on Initial Coin Offerings (ICOs),” has an “ICO Updates” section that is headlined by enforcement actions brought by the Commission. Only when you click through to “More” do you see other materials. Of particular concern is that these enforcement actions and guidance pieces, taken together, offer no clear path for a functioning token network to emerge.” [emphasis added]

Unlike some other jurisdictions, such as France or the UK, the US has been slow to acknowledge that crypto-assets or tokens may be issued as something other than a security or a currency like asset.

Peirce declared her support for creating a new “safe harbor” for an issued token – a process she has recently broached:

“I support creating a non-exclusive safe harbor period within which a token network could blossom without the full weight of the securities laws crushing it before it becomes functional. By allowing legitimate projects to get their tokens into the hands of a broad set of developers and network users without fear of enforcement, we also would allow the SEC’s Enforcement Division to focus its resources on the fraudulent actors in the realm of crypto offerings.”

[easy-tweet tweet=”I support creating a non-exclusive safe harbor period within which a token network could blossom without the full weight of the securities laws crushing it before it becomes functional” template=”light”]

The real fear of SEC enforcement has compelled more than one digital asset project to decamp to friendly jurisdictions. While some observers believe that this temporary vote with your feet shift of innovation to other countries will eventually reverse, others wonder what it will take to enable crypto innovation to “blossom.” Every legitimate industry participant wants regulation. They just want it clarified – not a moving target.

There has been recent chatter regarding the creation of a safe harbor by industry participants for some time now. It appears that Commissioner Peirce may be leading the charge at the Commission.

Peirce believes the SEC could improve itself by focusing more on compliance and less on enforcement as a way to solve the problems in financial service. Instead of being reactionary and rolling out the big enforcement guns first, perhaps the Commission should work more closely with innovators. How about a Fintech Sandbox – similar to what the UK FCA has created?

SEC Chairman Jay Clayton: Main Street investors should be able to invest in the private market on terms similar to those available to institutional investors

Securities and Exchange Commission (SEC) Chairman Jay Clayton has re-affirmed his belief that retail investors should have a compliant path to access more private securities offerings.

While initial public offerings (IPOs) have morphed into an exit opportunity for big money where retail investors end up holding the bag, and most wealth is captured in private securities offerings, Chair Clayton is looking to right this societal wrong that disenfranchises much of the population.

In opening remarks at the SEC’s Investor Advisory Committee meeting, Clayton said:

“I believe it is our obligation to explore whether we can reduce cost and complexity, and increase opportunity for our Main Street investors in this important market, including through professionally managed funds, where Main Street investors are able to invest in the private market on terms similar to those available to institutional investors. Importantly, we must ensure appropriate investor protections for our long-term Main Street investors.”

This is not the first time Clayton has expressed his opinion on leveling the playing field when it comes to investment opportunity. For some months now, Clayton has messaged his ambition to create a regulated path for retail investors to gain access to promising early-stage firms that frequently raise growth capital under Reg D – currently the realm of VCs and the very wealthy.

In the past, Clayton has also expressed his goal of addressing the definition of an Accredited Investor, which is fundamentally flawed. The current definition is widely understood as a poor metric for financial acumen and sophistication.

Clayton’s comments come at a time during a regulatory review on exemption harmonization as encapsulated in a “Concept Release.” The consultation recently closed comments from interested parties in September.

SEC Division of Enforcement Annual Report: “A diverse mix of 862 enforcement actions” including ICOs and Digital Assets

The Securities and Exchange Commission (SEC), Division of Enforcement, has published its annual report on enforcement. The Division of Enforcement is the largest division at the SEC.

The report states that, during the fiscal year, the SEC brought “a diverse mix of 862 enforcement actions, including 526 standalone actions.” These enforcement actions saw the SEC obtaining judgments and orders totaling more than $4.3 billion in disgorgement and penalties. The SEC also states that it returned roughly $1.2 billion to harmed investors as a result of enforcement actions.

SEC Chairman Jay Clayton said the report reflects the division’s focus on rooting out misconduct and taking action to help impacted investors:

“Across a broad array of cases, the Enforcement staff has continued to show determination, sophistication, and thoughtfulness in detecting and deterring bad conduct and crafting meaningful remedies. I thank the dedicated women and men of the division, in our home office and in our 11 regional offices, for their efforts in support of our mission and investors.”

The Enforcement report describes the division’s efforts guided by five core principles: (1) focus on the Main Street investor, (2) focus on individual accountability, (3) keep pace with technological change, (4) impose remedies that most effectively further enforcement goals, and (5) constantly assess the allocation of resources.

Regarding enforcement actions taken against initial coin offerings (ICOs) and digital assets, the SEC says “activities in the digital asset space matured and expanded.” The new Cyber Unit investigated and recommended to the Commission many of these enforcement actions.

The SEC highlights the fact that it filed its first charges for unlawful promotion of ICOs, including cases against a “pair of celebrities who “touted” digital assets without disclosing that they were paid to do so.”

Some of the high profile digital asset enforcement actions include Paragon Coin, Kik and Airfox.

The Enforcement Report includes a listing of all actions taken during the fiscal year.


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Despite SEC Lawsuit, Telegram Launches Early Version of Desktop Wallet for Its Blockchain-based Gram Tokens

Encrypted messaging provider Telegram has launched an early desktop wallet for its blockchain-based Gram tokens.

Users can download Telegram’s test app for Windows, MacOS, Linux 64 bit operating systems from the company’s official website and get their keys on the Telegram Open Network (TON) testnet. 

Like most other crypto wallets, the messaging giant’s wallet requires that users save their 24-word SEED phrase and also create a unique password for handling payments. After completing these initial steps, users can send and receive Gram tokens from their wallets.

The app’s developers tell new users:

“Now you have a wallet only you control – directly, without middlemen or bankers.”

There’s a special Telegram bot that gives users testnet Gram tokens. The bot sends between 5 to 20 tokens each time. 

The developer of Telegram’s TON network raised approximately $1.7 billion via a closed (private) token sale in 2018. TON’s mainnet was expected to go live towards the end of last month. In September 2019, the project’s team members published source code for a full node, a validator node and block explorer.

In early October, TON project’s creators released the terms of use for the company’s online wallet app and asked investors to share their public keys using the platform’s key generator tool. 

The same key generator has now been built into the app.

The launch of the TON network was delayed after Telegram was sued by the US Securities and Exchange Commission (SEC). The federal regulator has said that Telegram’s Gram tokens are unregistered financial securities. The SEC asked the court to prevent Telegram’s management from distributing tokens to investors. 

Telegram’s investors have decided to allow the messaging giant to delay the launch of TON until the end of April next year, so that there’s more time to clear up the matter with the SEC.

SEC and CFTC Charge Swiss-Based First Global Credit for Selling Unregistered Swaps for Bitcoins; Website Domain Seized by FBI

A Switzerland-based securities dealer called XBT Corp/First Global Credit has been charged and fined by the American SEC and CFTC for, “selling unregistered security-based swaps to U.S. investors using bitcoins and for failing to transact its swaps on a registered national exchange.”

The company’s website has been seized by the FBI and is now offline.

According to the SEC, swaps dealers selling to US investors must be registered under Dodd-Frank laws:

“First Global Credit used a variety of marketing methods to target and solicit U.S. individuals to deposit and use bitcoins to buy and sell a variety of investment products. Although First Global Credit used different terminology to describe the investments it offered, including ‘bitcoin Asset Linked Notes,’ investors were able to participate in the price movements of securities, including those listed on U.S. securities exchanges, without owning them. These types of instruments are considered security-based swaps under the U.S. federal securities laws. First Global Credit offered these swaps to U.S. investors without complying with the registration and exchange requirements governing security-based swaps, which were enacted as part of the Dodd-Frank Act.”

David Peavler, Director of the SEC’s Fort Worth Regional Office, said new terminology and new tech do not exempt investment-product dealers from having to properly register.

“Federal securities laws impose specific requirements for offering and selling security-based swaps to retail investors in the US,” said Peavler. “These obligations cannot be avoided merely by describing the swap transaction by a different name or funding it with digital currencies.”

The SEC says First Global Credit, “transacted with investors who did not meet the discretionary investment thresholds required by the federal securities laws.”

As well, company allegedly, “failed to transact its security-based swaps on a registered national exchange, and failed to properly register as a security-based swaps dealer.”

Without admitting or denying the SEC’s findings, First Global Credit agreed to cease-and-desist operations and pay disgorgement of $31,687 and a penalty of $100,000.

First Global Credit must also pay back investors who lost money

In a parallel action, the CFTC announced a similar settlement with First Global Credit.

The company will also pay a fine of $100,000 to the CFTC and must, “disgorge gains received in connection with its violations, and to cease and desist from future violations of the Commodity Exchange Act (CEA).”

“This case demonstrates that the CFTC will hold intermediaries accountable if they solicit or accept orders without properly registering with the agency,” said CFTC Director of Enforcement James McDonald. “This case also underscores that the Commission will continue working with our law enforcement and regulatory partners to ensure the integrity of our markets.”

The CFTC writes that the trades in question took place between March 2016 and July 2017, when First Global Capital, “solicit(ed) or accept(ed) orders for futures from U.S. customers and by accepting bitcoin to margin their trades without being registered with the Commission…(and) accepted orders from U.S. customers for the purchase and sale of commodity futures listed on the Chicago Mercantile Exchange Globex trading platform.”


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Report: Investors Grant Extension to Telegram After US Token Sales Halted in SEC Emergency Action

Telegram’s appeal to investors asking for a six-month extension on the launch of the TON blockchain in the wake of an American SEC emergency action against the firm has been granted, Russian Forbes reports.

Paraphrasing two unnamed sources, the outlet claims:

“Investors in the Telegram Open Network (TON) blockchain platform approved the delayed launch of the platform and refused to demand a refund. The decision was made by investors of both rounds of TON funding by a majority vote…”

Telegram had promised to launch the TON blockchain by October 31st of this year but,  “the recent SEC lawsuit has made that timing unachievable,” a Telegram spokesperson told Coindesk.

Until recently, everything appeared to be going swimmingly for Telegram and investors. Secondary sales of Telegram’s GRAM tokens had already begun in Asia, albeit contrary to rules prohibiting token resales until after the launch of the blockchain.

As the deadline for launch of the TON blockchain was fast approaching, there was little indication that the project would be delayed.

But the sudden filing of an emergency action by the US Securities and Exchange Commission (SEC)  against Telegram earlier this month cast a dark cloud over the project.

A temporary restraining order is now in place in the US prohibiting the secondary sale of GRAM tokens to retail investors there.

According to the SEC, if not for the prohibition:

“Defendants plan to sell billions of securities that will quickly come to rest in the hands of U.S. investors without providing those investors important information about their business operations, financial condition, risk factors and management.”

171 investors purchasing GRAM tokens sank $1.7 billion USD into Telegram in two $850 million USD funding rounds conducted in early 2018.

The funds are being used to construct the “Telegram Open Network,” a software protocol being designed as an “immutable” blockchain that uses “proof-of-work,” a type of layered encryption that is very costly to produce and which is increasingly under fire for its environmental impact.

The TON white paper, a work in progress, is authored by Nikolai Durov, the mathematician brother of entrepreneur Pavel Durov. Together, the brothers created a Russian Facebook-style site called VContact and Telegram, an encrypted mobile messaging app being attacked now by governments in Russia and Iran due to their concerns about subversive communications.

Telegram brought considerable reputation and “street” cachet to the table when it began shopping out its tokens, and available GRAMs sold out quickly. An estimated 35 accredited American VCs and investing firms participated in the token sale.

Telegram had promised some form of refund if TON failed to launch by the deadline.

Last week, the company offered investors an approximate refund of 77% if they did not want to grant the project a six month extension to April 30th, 2020.

Now that the extension has been granted, Telegram reportedly plans to spend an additional $80 million USD developing TON.

SEC Investor Advisory Committee Schedules Meeting, Will Discuss Concept Release on Harmonization of Securities Exemptions

The Securities and Exchange Commission’s (SEC) Investor Advisory Committee will hold a public meeting on Nov. 7, 2019. A portion of the meeting will address the SEC’s concept release on the Harmonization of Securities Offering Exemptions.

The meeting, which is open to the public and live-streamed on the SEC website, will include an afternoon panel to review the current structure of securities exemptions and, perhaps, other items tackled in the concept release.

Launched by SEC Chair Jay Clayton, the Commission is seeking to simplify and improve the alphabet soup of methods to raise private capital. This also includes the three securities crowdfunding exemptions; Reg D 506c, Reg A+ and Reg CF.

In the US, the private securities market is huge – far larger than the current IPO market. In many ways, policymakers and their rule upon regulation approach regarding public markets has compelled promising young firms to steer clear of public markets for as long as possible due to both the initial and ongoing cost.

Chair Clayton has indicated his hope that public markets can be made more effective while private markets are opened up to a greater number of investors who have largely been cut out of the robust market.

Most industry followers recognize the ecosystem of rules has become rather convoluted. While the SEC may be seeking to simplify existing rules the task is a significant challenge due to ossified rules, well-established practices and regulatory fiefdoms that struggle with change.

The following individuals will be participating in the panel:

  • Renee Jones, Associate Dean of Academics and Professor, Boston College Law
  • Tyler Gellasch, Executive Director, Healthy Markets Association
  • Jennifer Zepralka, Chief, Office of Small Business Policy, SEC
  • Andrea Seidt, Ohio Securities Commissioner
  • Catherine Mott, CEO, Founder and Managing Partner, BlueTree Capital Group, LLC

The complete agenda may be viewed here.

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.

SEC and Morehouse College Hosting Event for Minority Entrepreneurs in Atlanta

The US Securities and Exchange Commission and Morehouse College are co-hosting a panel discussion for the general public on October 24th in Atlanta.

From 4 to 7 pm, panelists and attendees will address and hear about, “strategies to attract investment capital to minority businesses.”

The event will be held on campus at Morehouse College and, “will feature conversations with minority entrepreneurs and investors who will explore solutions for overcoming barriers and share business successes.”

According to the SEC release regarding the event:

“A diverse group of entrepreneurs, alumni of Historically Black Colleges and Universities, Morehouse students and faculty, and other business leaders have been invited to attend this first-of-its-kind event led by the Morehouse Innovation and Entrepreneurship Center, the SEC’s Atlanta Regional Office, and the SEC’s new Office of the Advocate for Small Business Capital Formation. The event is open to the public.”

Featured speakers and panelists include:

  • Sheena Allen, CEO and Founder, CapWay.
  • Hakeem Atwater ’14, Co-founder, unboXt, Inc.
  • Keitra Bates, Entrepreneur and Owner, Marddy’s Shared Kitchen.
  • Ryan Germany, General Counsel and Assistant Commissioner of Securities and Charities, Georgia Secretary of State’s Office.
  • Paul Judge ’99, Entrepreneur and Angel Investor.
  • Amari Ruff, Founder, Sudu.
  • Lonnie Saboor, Director, Small Business Development, Invest Atlanta.
  • Arian Simone, Entrepreneur and Co-founder, Fearless Fund.
  • Theia Smith, Founder and former Executive Director, City of Atlanta’s Women’s Entrepreneurship Initiative.
  • Jewel Burks Solomon, Entrepreneur, Angel Investor and Co-founder, Collab Capital.
  • Eric Troy ’84, Partner, Global Strategies, LOUD Capital.

SEC Chair Jay Clayton said the event is being supported by a new division at the SEC:

“The SEC’s continued commitment to supporting entrepreneurs and investors from all backgrounds has been bolstered by our new Office of the Advocate for Small Business Capital Formation…I’m proud to have the agency serve as a resource for owners of small businesses, including minority and women-owned businesses, as they navigate our markets.”

Martha L. Miller, Director of the SEC Office of the Advocate for Small Business Capital Formation, said she is “thrilled” that the event is taking place:

“Our office is keenly focused on supporting minority-owned businesses and shining a light on their success stories, as well as highlighting ways that we can improve the rules to support more diverse founders and funders.”

The President of Morehouse College, David A. Thomas, lauded the event’s educational impact:

“At Morehouse College, we develop men who are focused on service and leadership. Many of our students have entrepreneurial interest…We are honored that the Securities and Exchange Commission, leading entrepreneurs, and national investors are partnering with us in this important conversation about funding minority businesses. The dialogue will help the men of Morehouse to identify ways to help finance their business ideas and achieve their dreams.”

Morehouse College is billed as, “the nation’s largest liberal arts institution for men.” Active since 1867, the College says it enrolls about 2,200 students per yer.

Interested parties may reserve seats for the panel discussion here.

Telegram Responds to SEC’s Enforcement Action: SEC is Attempting to “Steamroll Telegram Into Consenting to a Preliminary Injunction Where There is No Need”

Telegram has responded to the Securities and Exchange Commission’s enforcement action revealed last week.

On October 11, the SEC filed an emergency action and obtained a temporary restraining order against Telegram. The SEC targeted an alleged unregistered, ongoing digital token offering in the U.S. and overseas that has raised more than $1.7 billion of investor funds. The affiliated token was scheduled to issue at the end of this month thus causing a dramatic impact to Telegram’s plans.

On October 16, Telegram filed a response to the SEC stating:

“… it is apparent that the SEC is attempting to seize upon the Order to Show Cause, submitted by the SEC and entered ex parte, to steamroll Telegram into consenting to a preliminary injunction where there is no need. The SEC’s unreasonable and wholly unnecessary position has thus necessitated this filing two days in advance of Telegram’s ordered deadline of October 18.”

Telegram has pushed pause on the distribution of their “Grams” token’s until the issue is summarily resolved, even though the SEC’s actions are described as being without merit.

It is notable that Telegram, via their counsel of Skadden, Arps, has reaffirmed its insistence that they “voluntarily engaged with, and solicited feedback from, the SEC” for the past 18 months.

Telegram claims that its digital assets are not securities and the SEC’s actions are “fundamentally flawed.”

“Telegram entered into private purchase agreements with a limited number of highly sophisticated purchasers (the “Private Placement”) that provided for the future payment of a currency (Grams) but only following the completion and launch of the TON Blockchain. Significantly, Telegram has already treated the Private Placement as a securities offering pursuant to valid exemptions to registration under the Securities Act of 1933. The Grams themselves, as distinct from the purchase contracts, will merely be a currency or commodity (like gold, silver or sugar) — not a “security” — once the TON Blockchain launches. As one SEC Director publicly opined, a digital currency “all by itself is not a security, just like [] orange groves [are] not.”

As Telegram has voluntarily agreed to halt the issuance of Grams, “there is no need for the Court to enter a preliminary injunction, which has the potential to be misconstrued by Telegram’s private placement subscribers and the public in this highly-publicized matter.”

This case regarding a high profile token offering will be watched closely by both traditional and digital asset industry participants. As Crowdfund Insider previously reported, the fact that the SEC was willing to pursue a well-capitalized company such as Telegram is indicative of its willingness to pursue the largest coin issuers regardless of their geographic location.

As was reported yesterday, Telegram has asked investors to accept a delay until April 2020 while simultaneously providing an option for a partial rescission (77%).


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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.

Following SEC Action Halting TON Token Sale in US, Telegram Issues Letter to Investors

A letter from a spokesperson for Telegram regarding the SEC’s emergency action to halt the sale of GRAM tokens to US investors has been making the rounds in the crypto media and on forums.

In the the letter, “Shyam” states that Telegram, maker of a popular messaging app of the same name, tried for 18 months to communicate with with the SEC regarding the TON blockchain, construction of which was to be funded by the sale of GRAM tokens.

“We were surprised and disappointed that the SEC decided to sue in these circumstances, and we do not agree with the legal position of the SEC,” Shyam writes.

In January 2018, as much of the air started to leave the ICO (initial coin offering) bubble, Telegram conducted a late-stage ICO raise and collected about $1.7 billion USD from investors around the world, including 39 accredited investors/ VCs in the US.

Russian businessperson Pavel Durov created Telegram and TON with his brother, Nikolai, a mathematician. Pavel Durov reportedly lives in exile after losing control of the Russian Facebook-style site he created when it ran afoul of Russian authorities and was acquired under pressure.

For “state security reasons,” Russian authorities have also been trying to prohibit Telegram messaging in the country because the app purportedly allows anonymous messaging.

Hong Kong sovereigntists using Telegram to coordinate protests claimed in August, however, that Telegram was leaking their telephone numbers to Chinese authorities.

The company subsequently adjusted the service to allow users to hide their phone numbers.

Telegram and its proposed TON blockchain project benefited both from the ICO investing frenzy that preceded and from Telegram’s perceived street cred. GRAM tokens sold quickly.

But the SEC came down very hard last Friday on the project, claiming that VCs planned to dump GRAM tokens on retail and flout laws designed to protect retail investors:

“Our emergency measures are aimed at preventing Telegram from flooding the US market with digital tokens sold, in our opinion, illegally. We claim that the defendant did not provide investors with information on the Gram and Telegram business transactions, financial condition, risk factors and management, which is required by law.”

In the letter to investors, Shyam says Telegram is evaluating TON and GRAM and may postpone the launch of the TON blockchain, which the company had promised would be ready by October 31st or a refund available to investors.

Here it the text of the letter in full, pasted from the Russian forum:

“For our investors,

as you probably saw, on October 11, the US Securities and Exchange Commission (SEC) filed a lawsuit against the Telegram Group Inc. in the US federal court. and TON Issuer Inc., in an attempt to prevent the launch of the TON blockchain. In accordance with SEC’s stated desire to interact with developers of digital asset technologies, Telegram over the past 18 months has tried to interact with SEC and receive feedback on the TON blockchain. We were surprised and disappointed that the SEC decided to sue in these circumstances, and we do not agree with the legal position of the SEC.

Together with our consultants, we continue to evaluate the best ways to resolve the situation in the interests of the parties involved, including, but not limited to, evaluating whether it is worth trying to postpone the launch date. We are working hard to quickly resolve these issues, and hope to provide further updates over the next week.

Regards,
Shyam”

SEC Is Holding Settlement Discussions With Allegedly Fraudulent ICO Organizer Reggie Middleton

The US Securities and Exchange Commission (SEC) has reportedly initiated settlement discussions with Reggie Middleton, the manager of Veritaseum’s (VERI) $14.8 million initial coin offering (ICO).

In August, the SEC Enforcement Division announced charges against Reginald “Reggie” Middleton who allegedly engaged in fraud related to a digital securities offering. At the same time, the courts granted an emergency freeze of some funds.

At that time, Middleton’s Attorney, David Kornblau, a Partner at Covington & Burling, issued a 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.”

According to a filing submitted to the New York Eastern District Court (released on October 2), the federal regulator noted that it held discussions with the defendants ahead of a pretrial conference.

The SEC’s latest settlement discussions with the Veritaseum ICO organizer have been announced shortly after two other settlements were entered by the regulator over unregistered digital securities offerings. 

On October 1, distributed data storage startup Sia managed to finalize a $225,000 settlement over its $120,000 raise. On September 30, EOS developer Block.one was ordered to pay a $24 million fine for raising $4.1 billion without proper regulatory approval.

Middleton has previously claimed that VERI tokens are not securities. He has been accused of misleading investors about the token’s long-term value. He also has referred to VERI tokens as “software” while also comparing them to prepaid gift cards.

Additionally, Middleton has been accused of manipulating the value of the tokens after the ICO, and misappropriating around $520,000 of investors’ funds.

On October 8, Magistrate Judge Ramon E. Reyes rescheduled the pre-trial conference for November 14.