Blockchain/Initial Coin Offering Fraud and SEC Whistleblower Program
Though blockchain technology can help prevent fraud, it can be also used to perpetrate fraud. As the SEC warned in a recent investor bulletin, “[f]raudsters often use innovations and new technologies to perpetrate fraudulent investment schemes” and “it is relatively easy for anyone to use blockchain technology to create an initial coin offering (ICO) that looks impressive, even though it might actually be a scam.” Commentators have indicated that the lack of regulatory oversight of ICOs is alarming and may lead to the next financial scandal. The most common securities law violations that the SEC warns about with ICOs are: (1) a failure to register the coins/tokens as securities; and (2) market manipulation schemes.
Whistleblowers disclosing blockchain fraud in connection with ICOs can be eligible for SEC whistleblower rewards. A former SEC attorney has indicated that the SEC Whistleblower Program could be a source for an investigation. The program has been very effective in enabling the SEC to protect investors and halt ongoing fraud schemes. To learn more about the SEC Whistleblower Program, see our column in Forbes: One Billion Reasons Why The SEC Whistleblower-Reward Program Is Effective.
To learn more about whistleblower rewards or whistleblower protections, contact an experienced SEC whistleblower attorney at Zuckerman Law for a free confidential consultation at 202-262-8959, or click here.
Initial Coin Offerings are Securities and Subject to Rules Prohibiting Offering Fraud
Token sales, also known as initial coin offerings or ICOs, have become an important source of funding for cryptocurrency projects and have raised more than $200M in capital in 2017. According to Smith + Crown, a crypto finance research firm, “ICOs provide a way for cryptocurrency project creators to raise money for their operations” and “[m]ost ICOs raise money in Bitcoin or other cryptocurrencies.” The SEC warns that certain ICOs may be considered an offer or sale of securities, and thus subjected to regulation under federal securities laws, depending on the “economic realities” of the particular transaction.
In July 2017, the SEC issued an investigative report concluding that digital tokens offered and sold by a “virtual” organization known as “The DAO,” for decentralized autonomous organization, were securities and therefore subject to the federal securities laws. The DAO had used blockchain technology to raise about $150 million in 2016. The SEC said it would not take any enforcement action against the organization, but clarified that it could have as the organization’s tokens were sold online to U.S. investors and legally qualified as securities.
While the report only represents the SEC’s evaluation of one coin offering, it nonetheless confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Indeed, the SEC warned that registration “requirements apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.”
Initial Coin Offering “Pump and Dump” and Market Manipulation Schemes
The SEC also warns that companies claiming to be related to, or asserting that they are engaging in, ICOs may be attempting scam investors by fraudulently manipulating the market. In one market manipulation scheme, known as the “pump and dump” scheme, fraudsters seek to boost a company’s stock by issuing false or misleading statements to the marketplace. After “pumping” up the stock through these false or misleading statements, the fraudster will then “dump” their shares to quickly profit from the misinformation.
In August 2017, the SEC issued an investor alert related to public companies making ICO-related claims. The investor alert was issued after the SEC suspended the trading of four companies’ shares for making “claims regarding their investments in ICOs or touted coin/token related news.” The companies affected by trading suspensions include First Bitcoin Capital Corp., CIAO Group, Strategic Global, and Sunshine Capital.
SEC Files Emergency Action to Enjoin Cryptocurrency Fraud
In late September 2017, the SEC sought an emergency order to freeze the assets of Maksim Zaslavskiy and his companies for selling digital tokens or coins that do not really exist. Zaslavskiy touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate” and claimed that he raised $2 million and $4 million from investors when the actual amount is approximately $300,000, Click here to read the complaint. The SEC alleges that Zaslavskiy engaged in securities fraud and engaged in the unlawful sale and offer to sell unregistered securities.
SEC Warns About Initial Coin Offerings
The SEC’s Office of Investor Education and Advocacy recently issued an investor bulletin warning investors about the risks of investing in ICOs. According to the bulletin, investors should be alert to the following warning signs:
- “Guaranteed” high investment returns.
- Unsolicited offers.
- Sounds too good to be true.
- Pressure to buy RIGHT NOW.
- Unlicensed sellers.
For more information about risks related to investing in virtual currencies, see these SEC resources:
- SEC Investor Alert: Bitcoin and Other Virtual Currency-Related Investments
- SEC Investor Alert: Ponzi Schemes Using Virtual Currencies
- SEC Investor Alert: Social Media and Investing – Avoiding Fraud
Blockchain Fraud and ICO SEC Whistleblower Attorneys
Zuckerman Law represents whistleblowers worldwide in disclosing fraud and other securities law violations to the SEC, including:
- Accounting fraud;
- Investment and securities fraud;
- Insider trading;
- Foreign bribery and other FCPA violations;
- EB-5 investment fraud;
- Manipulation of a security’s price or volume;
- Fraudulent securities offerings and Ponzi schemes;
- Unregistered securities offerings;
- Investment adviser fraud;
- False or misleading statements about a company or investment;
- Inadequate internal controls;
- Deceptive non-GAAP financial measures; and
- Violations of auditor independence rules.
To learn more about incentives for whistleblower to disclose fraud to the SEC, download our free guide SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award.
In the SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award, the whistleblower lawyers at Zuckerman Law share their experience gained from representing whistleblowers before the SEC and cover the following topics:
Overview of the SEC Whistleblower Program
- What is the SEC Whistleblower Program?
- Can I submit an anonymous tip to the SEC Whistleblower Office?
- What employment protections are available for SEC whistleblowers?
- What violations qualify for an SEC whistleblower award?
- What are the largest SEC whistleblower awards?
Whistleblowers Eligible for an Award
- Who is an eligible SEC whistleblower?
- Can I submit a claim if I had involvement in the fraud or misconduct?
- Can I submit a tip if I agreed to a confidentiality provision in an employment/severance agreement?
- Can compliance personnel, auditors, officers or directors qualify for an SEC whistleblower award?
Reporting to the SEC and Maximizing Award Percentage
- When is the best time to report the fraud or misconduct to the SEC?
- Do I have to report the violation to my company before reporting the violation to the SEC?
- Can I submit an SEC Whistleblower claim if the SEC already has an open investigation into the matter?
- How do I submit a tip to the SEC?
- What type of evidence should I provide to the SEC?
- What factors does the SEC consider when determining the amount of the award?
- Why should I choose the Zuckerman Law to represent me in my SEC whistleblower claim?
After Reporting to the SEC
- What happens after I submit a tip to the SEC?
- How long does it take to receive an SEC whistleblower award?
Report Blockchain Fraud and Qualify for an SEC Whistleblower Reward