In a flurry of activity and confluence of developments, the SEC, FINRA and a Brooklyn federal judge have commenced actions and made rulings that continue to define the regulatory framework and obligations surrounding the sale and trading of digital securities, whether they are labeled as cryptocurrencies or tokens.
SEC Cease and Desist Order
On Tuesday, September 11, 2018, the Securities and Exchange Commission entered its first Administrative Order against a hedge fund manager that invested in digital assets, or cryptocurrencies, claiming that he violated the Securities Act of 1933 and the Investment Company Act of 1940 by failing to register with the SEC, and the Investment Advisers Act of 1940, which makes it unlawful for any investment adviser to a pooled investment vehicle to make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle.
The SEC Administrative Order can be found here.
FINRA Disciplinary Action
Also on Tuesday, September 11, 2018, The Financial Industry Regulatory Authority filed its first disciplinary action involving cryptocurrencies against a Massachusetts broker, claiming that he fraudulently sold HempCoins without registering them with the Securities and Exchange Commission, and that he engaged in the offer and sale of unregistered securities in contravention of Section 5 of the Securities Act of 1933 and thereby in violation of FINRA Rule 2010. The FINRA complaint can be found here.
Federal District Court Ruling on Motion to Dismiss
Finally, on Tuesday, September 11, 2018, a Brooklyn federal judge ruled that an action against a defendant that is alleged to have engaged in a fraudulent offering of virtual securities related to two Initial Coin Offerings could not be dismissed on the grounds that the digital tokens were not securities, but rather that the question of whether the tokens were securities was one that a jury would have to decide. This case is one of the first to consider the applicability of federal securities laws in a criminal case involving digital securities or tokens. The Memorandum and Order on the Motion to Dismiss can be found here.
Additional SEC Cease and Desist Order
In addition to the foregoing, there was also one more noteworthy item involving another SEC Administrative Order that involved the settlement by TokenLot LLC, an ICO “superstore”, in which they were alleged to have acted as an unregistered broker-dealer. TokenLot this was a platform that was touted as a way to purchase and engage in secondary trading of digital securities. The action was based upon claims that Token Lot violated the Securities Exchange Act of 1934 due to their failure to register as a broker-dealer while their profits were made from facilitating trades and from a percentage of funds raised during their offerings. The individuals involved agreed to industry and penny stock bars as well as bars from serving or acting as an employee, director or member of an investment company or investment adviser. The Administrative Order can be found here.