SEC Files First-Ever Civil Fraud Charges Against ICO Companies

We keep hearing that ICOs are the problem. Which came first, the Bitcoin or the ICO? Here’s what just went down to address the latter…

from Zero Hedge

That didn’t take long.

After issuing a ruling in July that officially declared that the tokens sold during initial coin offerings must be registered as securities – a ruling that many hoped would lend a badly needed veneer of legitimacy to the shady ICO market – the SEC is following through with what we imagine will be the first of many civil actions against ICOs and the individuals who launch them.

The agency on Friday announced civil actions against two companies and their founder, businessman Maksim Zaslavskiy, for violating anti-fraud and registration provisions of federal securities laws after misleading investors in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds.

 It’s important to remember that this is civil complaint – the SEC doesn’t have the power to make arrests; to do that, it must work in tandem with the FBI. Zaslavskiy is a free man. However, his assets – and those belonging to his companies – have been frozen. Instead, the agency is seeking to permanently ban Zaslavskiy from participating in any future digital-currency offerings, along with what we imagine will be hefty fines.

 

 

In its press release, the SEC accused Maksim Zaslavskiy and his companies of selling unregistered securities, while also alleging that the digital tokens or coins he was peddling didn’t really exist. According to the SEC’s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) were told (presumably by Zaslavskiy) that they could expect sizeable returns from the companies’ operations, when neither had any real operations to speak of.

As we’ve previously reported, the ICO market has exploded since late last year. The total sum raised has already reached $1.3 billion, with more expected by year’s end. However, the ease with which unscrupulous people could fraudulently market their tokens (and earn big money) has attracted attention from regulators all over the world. China cited fears about abuses related to ICOs as the reason for shuttering all local digital-currency exchanges. Russia briefly flirted with the idea as well.

Earlier today, FINMA, the Swiss government body responsible for regulating markets, said it was investigating several ICOs for possible fraud. In its press release announcing the investigations, the regulator explained that because ICOs are structured in a similar way to traditional stock offerings, they fall under the agency’s purview. So every time it has received a complaint related to ICOS, its representatives have pursued that complaint.

To the best of our knowledge, these are the first indications that any official regulatory action is being taken against ICO purveyors in either the US or Switzerland.

In its civil complaint, the SEC alleges that “from July 2017 to the present, Zaslavskiy, the President and sole owner of the Companies, fraudulently raised at least $300,000 from hundreds of investors, through various material misrepresentations and deceptive acts relating to supposed investments in digital “tokens” or “coins” offered, first by REcoin, then by Diamond, during the ICOs.”

Zaslavskiy allegedly touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate.”  Alleged misstatements to REcoin investors included that the company had a “team of lawyers, professionals, brokers, and accountants” that would invest REcoin’s ICO proceeds into real estate when in fact none had been hired or even consulted. Zaslavskiy and REcoin allegedly misrepresented they had raised between $2 million and $4 million from investors when the actual amount is approximately $300,000.

Zaslavskiy then carried his scheme over to Diamond Reserve Club. He marketed the organization as one that invests in diamonds and obtains discounts with product retailers for individuals who purchase “memberships” in the company. Despite their representations to investors, the SEC alleges that Zaslavskiy and Diamond have not purchased any diamonds nor engaged in any business operations. Yet they allegedly continue to solicit investors and raise funds as though they have.

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Full Press Release:

SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds

FOR IMMEDIATE RELEASE
2017-185

Washington D.C., Sept. 29, 2017—

The Securities and Exchange Commission today charged a businessman and two companies with defrauding investors in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds.

The SEC alleges that Maksim Zaslavskiy and his companies have been selling unregistered securities, and the digital tokens or coins being peddled don’t really exist. According to the SEC’s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) have been told they can expect sizeable returns from the companies’ operations when neither has any real operations.

Zaslavskiy allegedly touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate.”  Alleged misstatements to REcoin investors included that the company had a “team of lawyers, professionals, brokers, and accountants” that would invest REcoin’s ICO proceeds into real estate when in fact none had been hired or even consulted. Zaslavskiy and REcoin allegedly misrepresented they had raised between $2 million and $4 million from investors when the actual amount is approximately $300,000.

According to the SEC’s complaint, Zaslavskiy carried his scheme over to Diamond Reserve Club, which purportedly invests in diamonds and obtains discounts with product retailers for individuals who purchase “memberships” in the company. Despite their representations to investors, the SEC alleges that Zaslavskiy and Diamond have not purchased any diamonds nor engaged in any business operations. Yet they allegedly continue to solicit investors and raise funds as though they have.

The SEC obtained an emergency court order to freeze the assets of Zaslavskiy and his companies.

The SEC’s Office of Investor Education and Advocacy recently issued an investor alert warning about the risks of ICOs.

“Investors should be wary of companies touting ICOs as a way to generate outsized returns,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “As alleged in our complaint, Zaslavskiy lured investors with false promises of sizeable returns from novel technology.”

The SEC’s complaint, filed in federal district court in Brooklyn, N.Y., charges Zaslavskiy, REcoin, and Diamond with violations of the anti-fraud and registration provisions of the federal securities laws. The complaint seeks permanent injunctions and disgorgement plus interest and penalties. For Zaslavskiy, the SEC also seeks an officer-and-director bar and a bar from participating in any offering of digital securities.

The SEC’s investigation, which is continuing, has been conducted by Jorge Tenreiro, Pamela Sawhney and Valerie A. Szczepanik. The case is being supervised by Lara S. Mehraban. The SEC encourages victims of the alleged fraud to contact Ms. Szczepanik at (212) 336-1100.

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