The Securities and Exchange Commission filed an enforcement action against two companies and their sole owner – who also was the chief executive officer and president of both companies – for engaging in a fraudulent initial coin offering. The companies were Recoin Group Foundation, LLC (“REcoin”) and DRC World Inc. (known as Diamond Reserve Club), while the sole owner was Maksim Zaslavskiy.
According to the SEC, from July 2017 to the present, the defendants raised at least US $300,000 from “hundreds of investors” by soliciting persons through the Internet and elsewhere, to purchase digital tokens that would be backed either by real estate investments in the case of tokens issued by RECoin or diamonds in the case of digital coins issued by Diamond Reserve In fact, charged the SEC, investors received no digital tokens of any kind, and no digital tokens were backed by any of the promised assets.
The SEC charged the defendants with engaging in fraud and selling securities that were required to be registered but were not registered or lawfully exempted from registration. The SEC already has obtained an emergency court order to freeze assets of Mr. Zaslavskiy and his companies, but also seeks a permanent injunction, disgorgement, fines and other relief. The SEC’s action was filed in a federal court in Brooklyn, New York.
An ICO typically involves the issuance of a new digital token in return for an investment of fiat or an existing cryptocurrency in a fundraising related to a project. The new digital token may have the characteristics of a cryptocurrency, a security or a utility token (e.g., a preferred right to use the output of the project). The SEC has previously indicated that ICOs may involve the offering of securities that raise registration issues. (Click here for background in the August 3, 2017 Advisory, “SEC Warns That Digital Tokens May Be Securities” by Katten Muchin Rosenman LLP.) A number of foreign jurisdictions have issued similar analysis as the SEC, including the Australian Securities and Investments Commission last week; at least one country, China, has banned ICOs. (Click here to access ASIC’s advisory and here to access the article, “China Bans ICOs While HK SFC Joins Regulator Procession Warning Digital Tokens in ICOs May Be Securities” in the September 10, 2017 edition of Bridging the Week.) News reports indicated that, last week, South Korea joined China in banning ICOs (click here for sample article), while contrariwise, Japan granted its first licenses for cryptocurrency exchanges (click here for sample article).