United States: Cryptocurrency Update: SEC Files Fraud Charges Relating To ICO Schemes

Last Updated: October 16 2017
Article by Marc P. Berger and Helen Gugel

Two months after warning investors that some digital tokens or coins may qualify as securities under the federal securities laws, the Securities and Exchange Commission (SEC or the Commission) on September 29, 2017 brought its first enforcement action in connection with an initial coin offering (ICO).

A. SEC v. REcoin Group Foundation, LLC et al.

In a federal complaint, the SEC alleges that Maksim Zaslavskiy and his companies, REcoin Group Foundation (REcoin) and Diamond Reserve Club World (DRC), duped investors into purchasing unregulated securities in the form of digital tokens that were backed by fictitious assets. The alleged stated purpose of each ICO was to generate returns from (i) the appreciation in value of the investments each company would make in real estate (in the case of REcoin) or diamonds (in the case of DRC) and (ii) the appreciation in value of the digital tokens themselves – including one touted as "The First Ever Cryptocurrency Backed by Real Estate" – as the companies' businesses grew and/or the demand for such tokens increased. The complaint contends that the ICOs were purportedly styled as "Initial Membership Offerings" in an attempt to circumvent the federal securities laws, but the membership interests that were being offered to investors were "in all material respects identical to the ownership attributes of purchasing the purported 'tokens' or 'coins' and are securities within the meaning of the securities laws."

According to the SEC, the defendants made false promises that suggested the two companies would have sizable returns, even as neither had "any real operations." For example, while the companies were touted as having "expert" management teams, neither had "hired or consulted any lawyers, brokers, accountants, developers, or other professionals to facilitate its investments." The complaint further asserts that investors in the ICOs received nothing in return for their investments because the companies lacked sufficient technological expertise to create and deliver digital tokens. Based on these and other allegations, the SEC obtained an emergency order to freeze the defendants' assets.


ICOs are a modern-day twist on initial public offerings (IPOs). They provide a way for companies to raise capital through the issuance of proprietary digital tokens created through a technology called blockchain. These digital tokens confer some sort of value or right to the purchaser (but not necessarily an ownership interest, as would be the case in a traditional IPO). ICOs have become tremendously popular all over the world, raising over $2.3 billion in funding so far and demonstrating a meteoric growth rate of over 600% just this year. Because most ICOs are fueled by ideas that have yet to be realized – as opposed to shares of an existing company or some measurable proof of concept – both the barrier to entry and the offering price of the digital token are relatively low. This combination can be a boon to legitimate innovation, encouraging more companies to conduct ICOs to support new ideas. On the flip side, however, it can also provide a hospitable environment for fraud.

C. Regulatory Oversight

Against this backdrop, ICOs have been the subject of increasing attention from the SEC. On July 25, 2017, the SEC asserted jurisdiction over ICOs to the extent that the underlying digital tokens fall within the catchall category of securities known as "investment contracts." Declining to draw a bright-line rule, the Commission instructed that "whether a particular investment transaction involves the offer and sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances including the economic realities of the transaction." Specifically, the SEC will refer to the criteria set forth in the landmark Supreme Court case SEC v. Howey, which provides that an investment contract is (i) an investment of money (ii) in a common enterprise (iii) with profits to come solely from the efforts of others. In the ICO context, digital tokens that confer a right to access, use, or license a system – much like a franchise or licensing contract – are not likely to be investment contracts. In contrast, digital tokens that confer an equity or profit interest are likely to qualify as investment contracts and therefore be subject to SEC jurisdiction.

Thereafter, on August 28, the SEC issued an alert to warn investors about potential scams involving ICOs and noted that it has authority to suspend trading in a stock when it determines that such action is in the public interest. The alert provided examples of circumstances that might lead to a trading suspension, such as: (i) a lack of current, accurate, or adequate information about the company; (ii) questions about the accuracy of publicly available information; and (iii) questions about trading in the stock and the ability to settle transactions in the stock. Consistent with this guidance, the SEC suspended trading in company securities of several publicly traded blockchain related businesses. Notably, even in cases where the underlying digital token is not deemed a security, the SEC has jurisdiction to suspend trading or take other enforcement actions with respect to a company that is otherwise subject to its regulation.

On September 25, the Commission announced the creation of a Cybersecurity Unit that will, among other things, focus on "violations involving distributed ledger technology [i.e., blockchain] and initial coin offerings." On the same day, the SEC also announced the creation of a retail strategy task force that will "develop proactive, targeted initiatives to identify misconduct impacting retail investors." Given its apparent breadth, this task force may also implicate ICOs or other digital token-related activity.

The Commission's increasing engagement with digital tokens, coupled with the rapid growth of ICOs, suggests that this will be a key enforcement focus in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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

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

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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