Securities Enforcement Update: Cyber Unit Files First ICO Fraud Action

December 4, 2017

The U.S. Securities and Exchange Commission (SEC) announced Dec. 4 that its newly formed Cyber Unit filed its first enforcement action, in which it “obtained an emergency asset freeze to halt a fast-moving Initial Coin Offering (‘ICO’) fraud that raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month.”

An ICO is a cryptocurrency offering through which a promoter sells virtual tokens in order to raise capital. The tokens may be listed on online currency exchanges and are typically tradable for crypto or fiat currency. ICOs have been gaining in popularity since spring 2017.  While many ICOs are intended to be a quick and efficient way to raise capital, the SEC recently signaled that ICOs may constitute securities offerings that must be registered with the SEC or qualify for an exemption. On July 25, 2017, the SEC issued a 21(a) report stating that whether an ICO constitutes a security will depend on the facts and circumstances surrounding the offering. 

Recognizing the potential for abuse in this novel market, the SEC recently announced that it would increase its scrutiny of ICO marketing and registration. On Sept. 25, 2017, the SEC announced it was establishing a Cyber Unit as a taskforce within the Enforcement Division to better target cyber-related misconduct, including the policing of ICOs. Moreover,  in November, the SEC’s Enforcement Division announced that combating cyber-related threats would be a top organizational priority for 2018.

On Dec. 1, 2017, the Cyber Unit initiated its first action charging two individuals, Dominic Lacroix and Sabrina Paradis-Royer, and their company, PlexCorps, with: (1) fraud in violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder; and (2) the unlawful sale and offer to sell securities in violation of Section 5 of the Securities Act of 1933. Specifically, the complaint alleges that the defendants marketed and sold digital “PlexCoin Tokens” in a purported ICO by claiming, inter alia, that these tokens would yield a 1,354 percent profit in less than 29 days. The SEC seeks permanent injunctions, disgorgement plus interest, civil penalties and a bar for the two individuals.

Cyber Unit Chief Robert Cohen stated in the press release: “This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing. We acted quickly to protect retail investors from this [ICO’s] false promises.” 

The SEC clearly is signaling that it will closely watch the ICO market and move quickly to shut down any fraudulent offerings. It also will closely monitor ICOs to ensure they comply with the SEC’s registration requirements. Expect the SEC to be extremely active in this space in the coming year.

The case is SEC v. PlexCorps, et al., No. 17-7007 (E.D.N.Y. Dec. 1, 2017). The full text of the SEC’s press release is available online.

McGuireWoods’ securities and enforcement attorneys will continue to monitor and report on important developments for broker-dealer and investment advisers. For further information, please contact the authors or any member of the McGuireWoods team.