In recent weeks, Québec’s financial sector regulator, the Autorité des marchés financiers (AMF), has taken aggressive enforcement steps against individuals and companies allegedly involved in the promotion of the PlexCoin virtual currency. These actions demonstrate the resolve of regulators to enforce securities laws against promoters offering or selling tokens or digital coins without complying with applicable securities law. They also demonstrate the challenges of enforcing securities laws against individuals and entities promoting tokens or Initial Coin Offerings (ICOs) using the Internet, challenges which regulators may attempt to overcome by seeking orders against social media sites, search engines and other Internet intermediaries.

Background

PlexCoin purports to be a virtual currency that can be used for everyday transactions. PlexCoin’s web site contains various statements regarding the safety and efficiency of PlexCoin and claims that purchasers can make significant profits by purchasing PlexCoin during a pre-sale, which began on August 7, 2017. As of August 15, 2017, PlexCoin’s web site claims that nearly 11,000 participants have collectively contributed USD$2.5M during the PlexCoin pre-sale.

Prior to the pre-sale, however, the AMF obtained ex parte orders from Québec’s Financial Markets Administrative Tribunal (FMAT) against certain Québec companies and residents in connection the promotion of PlexCoin. Among other things, these orders:

  • prohibited the targets from trading any form of investment, including soliciting investors in Québec and the solicitation, from Québec, of investors outside the province;
  • ordered the targets to take down any advertisement or solicitations on the Internet relating to securities, including shutting down the PlexCoin web sites or, alternatively, making these web sites inaccessible to Québec residents;
  • required the targets to post the order on the PlexCoin web sites; and
  • ordered a social media site’s Canadian subsidiary to shut down PlexCoin’s social media accounts.

In its news release, the AMF noted that some of the targets of the orders had been subject to previous orders by the FMAT or fines imposed by the Court of Québec, Criminal and Penal Division.

On August 3, 2017, the AMF issued a further notice in which it “strongly cautions Québec consumers against solicitations relating to PlexCoin, being marketed as a virtual currency.” The AMF stated that the targets of the FMAT’s orders had apparently not complied with the orders.

Luis Millán, a legal and business journalist in Québec, has reported that the AMF raided the Québec City offices of one of the alleged principals in PlexCoin and that the AMF is considering whether to commence penal proceedings in the Court of Québec or refer the case to police. Mr Millan also obtained a copy of the AMF’s filing with the FMAT, which he says reveals that the AMF received an anonymous tip about PlexCoin in early July 2017. In the filing, the AMF argued before the FMAT that PlexCoin was an investment contract under the Québec Securities Act and that the entities purportedly behind PlexCoin did not appear to be incorporated in any jurisdiction, let alone registered with the AMF. Mr. Millán has also reported that the AMF is in discussions regarding shutting down PlexCoin’s social media presence.

Implications

Regulators are highly concerned that promoters of token sales and ICOs are not complying with applicable securities laws. Like the SEC’s recent notices regarding token sales and ICOs, the AMF’s notices and statements reveal a high level of concern that promotors of token sales and ICOs may be failing to comply with applicable securities laws and that consumers will participate without understanding the risks.

Regulators are prepared to take aggressive enforcement steps where promotors of token sales or ICOs do not comply with securities laws. So far in the PlexCoin case, the AMF has obtained various orders against individuals and entities within Québec, exercised powers to search offices and seize documents, and ordered an Internet intermediary to restrict access to information. The AMF may also refer the case to police for investigation and potential criminal prosecution.

Enforcing securities laws against promoters of token sales and ICOs is challenging. Despite the steps taken by the AMF, PlexCoin’s principals have apparently not complied with FMAT’s orders and PlexCoin remains operational, apparently raising millions of dollars in a short period of time. Much of the value contributed to PlexCoin has apparently been transferred by way of other virtual currencies, such as Bitcoin and Ethereum, making it difficult, perhaps impossible, for regulators to trace and freeze the value received by PlexCoin’s principals, if that should prove necessary.

Internet intermediaries can expect to be affected by enforcement. As part of its enforcement efforts, the AMF has obtained an order against a social media site ordering it to take down information about PlexCoin. Particularly given the Supreme Court of Canada’s recent decision upholding a worldwide de-listing order against Google, where promoters market tokens or ICOs on the Internet without complying with securities laws, regulators may seek orders requiring intermediaries like social media sites and search engines to restrict access to promotional information.