Implemented in September, the Securities Exchange Commission’s (“SEC”) Cyber Unit has brought its first enforcement action against an “Initial Coin Offering” (“ICO”) called PlexCoin. ICOs, which are listed on digital exchanges, are designed to raise money through the issuance of digital tokens. Generally, coins or tokens entitle investors certain rights related to a venture underlying the ICO, such as a right to profits, shares of assets, rights to use certain services provided by the issuer, and/or voting rights. The SEC recently hinted that an ICO’s digital coins are securities. Any ambiguity on that issue has now been put to rest.
ICOs are fertile ground for Ponzi schemes because many ICOs accept payment through Bitcoin. The fraudster has an advantage after the scheme unravels because assets held on Bitcoin are harder for the authorities to trace or seize.
PlexCoin’s mastermind was Dominic Lacroix, a serial securities law violator in Canada. Laccroix marketed PlexCoin as an investment opportunity where a team of experts (whose identities had to remain concealed) would invest the ICO’s proceeds into developing products through an unincorporated entity known as PlexCorps. The ICO promised that early investors who bought “PlexCoin Tokens” (shares) would realize returns of 1,354% in 29 days or less.
Predictably, the whole enterprise was a massive scam. The “team” of experts was non-existent—the purpose of the ICO was to fund the fraudsters’ lifestyle. In total, the ICO conned $15 million from investors. Of that amount, roughly $1.1 million has either been spent or identified in conventional accounts. The remainder of the funds is assumed to be held on Bitcoin or other blockchain addresses or wallets controlled by the fraudsters.
While it remains unclear how the SEC will regulate lawful ICOs, it is certain that fraudulent ICOs will be prosecuted under federal securities laws. The SEC’s Complaint alleges that the PlexCoin fraudsters violated, among others, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934.