According to recent news reports, the US Securities and Exchange Commission (SEC) issued subpoenas to as many as 80 entities and individuals involved in the virtual currency space over the last several months. News of the subpoenas follows months of increasing enforcement activity by the SEC and other regulators targeting virtual currencies and initial coin offerings (ICOs). It also follows repeated public statements by the Chairman of the SEC that the agency intends to focus its scrutiny on this area. Participants in the cryptocurrency and ICO arenas should keep abreast of these developments and should, as needed, consult counsel experienced with enforcement by the SEC and other regulators.
Cryptocurrencies and ICOs have been an enforcement focus of the SEC for months. On September 25, 2017, the agency announced the creation of a Cyber Unit that would focus on “targeting cyber-related misconduct” including misconduct involving ICOs. The formation of that unit was followed by a flurry of SEC enforcement activity. For instance:
- In September 2017, the SEC filed suit in the Eastern District of New York (EDNY) alleging that two ICOs (i.e., “REcoin” and “DRC”) were frauds.
- In December 2017, the SEC filed another EDNY complaint, this time halting a purported ICO scam for fraud and misrepresentations in connection with the sale of “PlexCoin.”
- In January 2018, the SEC brought a complaint in the Northern District of Texas that halted an allegedly fraudulent ICO by AriseBank, which was claiming to be the first “decentralized bank.”
- In February 2018, the SEC announced that it suspended trading of the shares of three companies amid claims by the companies that they acquired certain cryptocurrency and blockchain assets.
- On March 1, 2018, Overstock.com Inc.’s shares dropped after the company’s subsidiary, tZero, revealed that the SEC had requested information on tZero’s ICO back in December.
This enforcement activity has been accompanied by the repeated statements of SEC Chairman Jay Clayton that he intends the agency to remain focused on the cryptocurrency/ICO space, including with enforcement action. Many of Chairman Clayton’s statements have focused on the need to ensure that investors are protected against fraud and abuse and receive the protections of the securities laws (including required disclosures) as well as the important role of lawyers and other professionals in advising clients how to comply with their securities obligations. (Other regulators have also been active.)
This week’s news reports of as many as 80 subpoenas to individuals and entities in the cryptocurrency space underscores the trend of increased enforcement attention, and illustrates the SEC’s focus on this area. The New York Times reported that the subpoenas requested information regarding the marketing of cryptocurrencies as well as the identities of the investors. These lines of inquiry are consistent with statements by Chairman Clayton (and members of the SEC staff) that the agency will analyze the marketing of cryptocurrencies and ICOs to ensure the protection of investors and compliance with securities laws. And the sheer number of subpoenas suggests a broad enforcement effort by the SEC. In all, as these events unfold, it will be important for companies to keep abreast of new developments, to carefully review the statements and actions of regulators and to make sure they have reliable counsel to help them navigate in this increasingly dynamic area.