The SEC charged New York-based businessman Maksim Zaslavskiy for defrauding investors through two "so-called" initial coin offerings ("ICOs"). Mr. Zaslavskiy allegedly solicited money from investors in exchange for digital currency ("tokens" or "coins") which was purportedly tied to investments in real estate and diamonds that would appreciate in value over time. According to the SEC, both schemes were complete frauds with no investments or infrastructure behind them.
As more fully explained in a Cadwalader Memorandum, these recent enforcement actions may shed light on the SEC's future plans for regulating ICOs. An ICO is used to raise funds for a new company, similar to an initial public offering ("IPO"). ICOs offer investors digital tokens that are supported by blockchain technology. In Mr. Zaslavskiy's case, the SEC determined that the fictitious virtual tokens he offered in exchange for investments could be classified as securities because they were marketed as being "backed" by investments. According to the attorneys, this determination is a significant development for the SEC, which appears poised to allow ICOs to continue but increasingly willing to step in to prevent fraud in the space.
The attorneys stated that the SEC approach is consistent with earlier SEC guidance providing that digital currency offered as part of ICOs could be considered as securities and, thus, subject to the registration and anti-fraud provisions of federal securities laws. The attorneys highlighted a recent action against the DAO in which the SEC determined that "DAO tokens" constituted securities pursuant to the Howey test. Since this action, the attorneys said, "companies contemplating ICOs have been awaiting the SEC's next regulatory move in this space."
The attorneys opined that the CFTC, which has indicated that it considers digital currency to be a commodity, will also assert itself in the area of ICO regulation. Because of this, ICO-related enforcement may become a "shared responsibility" between the SEC and CFTC.
Commentary / Jeff Robins
The SEC does not appear interested at this point in asserting jurisdiction over ICOs generally. However, if advocates and asset managers hoped that the SEC's apparent hesitation meant that ICOs would remain broadly unregulated, they should expect to be disappointed. The SEC has clearly responded and asserted its authority in the digital currency space. What remains to be seen is whether the SEC will bring actions related to fraudulent ICOs that would require a much broader interpretation of securities definitions.
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