Canada: ICO Wars: The SEC Strikes Back


The emergence of initial coin offerings (ICOs) as a new form of fundraising and the dramatic gains in the price of many cryptocurrencies is, without doubt, one of the biggest capital markets stories of 2017. Notwithstanding a relatively widespread view that we may now be within a cryptocurrency bubble, ICO markets barrelled ahead in the third quarter, during which time135 ICOs raising US$2.3 billion were completed. This represents more than 100% growth in ICO activity since the second quarter of 2017 and dwarfs 2016, when ICOs raised a total of US$100 million for the entire year.

In addition to valuation concerns, the ongoing crypto-mania is, not surprisingly, drawing significant attention from securities regulators who are growing increasingly concerned about the risks and lack of investor protection inherent in most ICOs. In particular, we have seen increased activity from the United States Securities and Exchange Commission (SEC) in recent weeks – with the SEC Chairman publicly stating his views as to when tokens qualify as securities under U.S. law and encouraging regulatory action against ICOs that have either defrauded investors or did not comply with applicable securities laws.

Statement on Cryptocurrencies and Initial Coin Offerings

On December 11, 2017, SEC Chairman Jay Clayton released a public statement on cryptocurrencies and ICOs that contained strong warnings for investors considering investing in ICOs and further guidance for market professionals on whether an ICO will be considered to be an offering of securities under U.S. securities laws.

The statement reinforced the guidance contained in the SEC's earlier report on the DAO's ICO (as discussed in our August 30 Update, Initial Coin Offerings in Canada: The CSA Weighs In) by emphasizing that the securities law analysis applicable to any particular token sale will be focused on the specific terms and context of the offering. While Chairman Clayton noted certain types of tokens (for example, a token that represents a participation interest in a book-of-the-month club) may not implicate securities laws, he also indicated many token offerings emphasize the potential for realizing profit by way of secondary market trading, which he described as "key hallmarks of a security and a securities offering".

The statement also takes direct aim at the argument that utility tokens (tokens that can be used to access functionality on a network or service) are not securities on the basis that holders of these tokens do not have an expectation of profits based on the efforts of others. Chairman Clayton characterized this as elevating "form over substance" and very sensibly pointed out that calling a token a utility token or giving it some functionality is not determinative. This suggests, among other things, that issuers who conduct token sales by way of a SAFT should carefully consider the features of their particular token and the circumstances in which it is sold before concluding the token, when issued under the terms of the SAFT, will not be subject to regulation as a security.1

SEC Enforcement Actions

Chairman Clayton concluded his statement by noting that he has asked the SEC's Division of Enforcement to police ICOs "vigorously" and "recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws". Primary responsibility for this mandate falls to the SEC's "Cyber Unit", created in September 2017 to focus on cyber-related misconduct, including violations involving distributed ledger technology and ICOs.

The Cyber Unit demonstrated its commitment to Chairman Clayton's direction by bringing two enforcement actions against ICOs in relatively short order.

In the first action, the SEC obtained an emergency order freezing the assets of Quebec based PlexCorps and its founder Dominic Lacroix in connection with a $15 million ICO of tokens known as "PlexCoins". According to the SEC, the ICO was a "full-fledged cyber scam" in which Lacroix and PlexCorps sold PlexCoins on the basis that purchasers in the ICO would realize a 1,345% profit in just 29 days. The SEC charges followed cease trade orders that were issued against PlexCorps and Lacroix in Quebec by the Autorité des marchés financiers, which were intended to prevent PlexCorps from proceeding with its ICO (and which PlexCorps and Lacroix violated).

In the second action, announced on the same day Chairman Clayton released his ICO statement, California based Munchee halted a $15 million ICO of its MUN token and agreed to return the funds it had already received after the SEC contacted the company and advised the ICO constituted an illegal distribution of securities. Munchee took the view (stated in its white paper) that "the sale of MUN utility tokens does not post a significant risk of implicating federal securities laws". The SEC disagreed and issued an order outlining its analysis as to why the MUN tokens were securities, which focused significantly on the fact that Munchee's marketing around the offering had emphasized the steps it was taking to increase demand for the token and support secondary market trading.

Investor Class-Action Lawsuits

As illustrated by the SEC's recent actions, promoters of ICOs now face a significant risk of regulatory agency intervention if the offering does not comply with applicable securities laws. At the same time, entities conducting ICOs – and the individuals leading or promoting them – may also be exposed to civil claims, including class-action lawsuits, if investors lose money in a token offering.

For example, the founders and directors of Tezos are currently facing a number of class-action lawsuits in the United States related to Tezos' high profile US$232 million ICO that was completed in July 2017 to fund development of a new smart contract blockchain platform. Following the ICO, disputes between the founders of the project and the president of the Swiss foundation, established to conduct the ICO, reportedly led to significant delays in the project causing the futures price of the Tezos token to fall significantly. This led to the initiation of a number of class-action lawsuits alleging the ICO was an illegal and fraudulent sale of securities.

A similar class-action lawsuit was recently filed against Centra Tech and its founders accusing them of violating U.S. securities laws by conducting an unregistered US$30 million ICO of Centra Tokens to fund the development of a cryptocurrency-focused debit card. Following the ICO, which was famously promoted by boxing champion Floyd Mayweather, Jr., two of the founders left the project and questions arose regarding the accuracy of a number of statements the company had made to promote its ICO. The lawsuit seeks a return of the ICO funds to the investors.


The explosive growth of ICOs represents an exciting new fundraising option for early stage companies and has created a new asset class which gives investors direct exposure to emerging blockchain based technologies and products which many believe will create enormous value. However, the current "fast money" available through ICOs encourages unscrupulous promoters to flog fraudulent schemes aimed at taking advantage of investors. A number of these schemes are already starting to come to light and many more will undoubtedly surface in the coming months.

The SEC's recent pronouncements and enforcement actions, along with the rise of investor class-action lawsuits, represent a continuation of the trend towards greater regulatory scrutiny of ICOs and increased efforts to hold promoters who raise capital in this new way accountable for their actions and promises. Issuers who rely on distinctions between "utility" and "investment" / "securities" tokens to justify completing an ICO without complying with securities laws (or who continue to ignore securities laws altogether) risk being targeted by securities regulator or in class-actions (or both).


1 For a more detailed discussion of SAFTs, see our December 6, 2017 Update, Read this Before Your ICO: Exploring the SAFT Framework for Compliant Token Sales in Canada

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions