United States: Cracking Down On Crypto Around The World

This week, the Securities and Exchange Commission (SEC) announced an action against Kik Interactive, Inc., alleging an illegal $100 million digital securities offering through which more than 10,000 investors worldwide bought one trillion "Kin" tokens. The SEC alleged that Kik sold the Kin tokens without registering them.

The complaint alleges that Kik's business, a messaging service, was foundering by late 2016, and the company expected to run out of money within a year. Kik allegedly decided, therefore, to pivot to its Kin offering, which could fund its ongoing operations. Kik issued a white paper, and its CEO made a speech about the offering in May 2017; Kin would fund an ecosystem in which Kin could be used to buy goods and services. According to the SEC, "Kik relentlessly pitched Kin and the prospect that Kik's future efforts to develop the Kin Ecosystem would drive an increase in Kin's value."

Kik distributed the Kin through a Simple Agreement for Future Tokens (SAFT), which offered wealthy investors a discount on the price offered to the general public. Kik also conducted a general public offering. Each offering raised about half of the $100 million total, $55 million of which was raised from U.S. investors. The SEC has alleged violations of the Securities Act, seeks to permanently enjoin Kik from further similar offerings, and seeks disgorgement and civil penalties.

The SEC also brought an action against Longfin Corp., its CEO and a consultant, with the Commission alleging they falsified Longfin's revenue for the purpose of fraudulently securing the company's listing on Nasdaq. The SEC previously obtained a preliminary injunction against these defendants (and others), which froze $27 million in purportedly illegal trading proceeds and unregistered stock distributions. The Commission alleges the defendants obtained Reg A+ qualification by falsely representing in SEC filings that the company was principally managed and operated in the U.S., when, instead, it was managed and operated in India. The company also allegedly had no actual assets, with only $75 in cash on hand and a few hundred thousand dollars of receivables. The SEC alleged violations of multiple Securities and Exchange Act sections, and it seeks permanent enjoinment, civil penalties, an industry bar for the CEO, disgorgement and civil penalties.

In literal and figurative dark news, the U.S. Attorney's office for the Northern District of Texas has indicted an alleged darknet drug dealer. The accused has been charged with conspiracy to possess with intent to distribute a controlled substance, specifically fentanyl. The defendant allegedly tried to purchase the deadly drug, an opioid, by sending more than $120,000 in bitcoin to wallet addresses that federal agents controlled as part of the sting.

QuadrigaCX investors lost about $150 million earlier this year when its co-founder and CEO died, and the company reported no one could access the wallets that held their money. The FBI is now getting involved and has launched a website asking those who believe they are victims to provide information.

Outside the U.S., the Italian securities regulator has suspended investment firm Tessline and its cryptocurrency for violations of Italian finance law. Separately, the European Commission recently warned Malta that it needs stronger AML enforcement in the crypto sector, citing concerns that "[g]overnment shortcomings" could negatively impact the business environment and investments. In Australia, tax officials are reportedly investigating a dozen schemes that appear to center on cryptocurrencies, including investigation of a global financial institution that may have helped taxpayers hide assets and avoid taxation and/or aid criminal activities.

To read more about the topics covered in this week's post, see the following:

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