Technology continues to challenge regulators to keep up with the pace of change. The most recent wave of technological disruption hitting the securities industry is the rise of digital assets and the sale of digital tokens by issuers and market participants unaware of how these financial instruments are subject to financial industry regulation. Since the SEC’s Report of Investigation, The DAO (Exchange Act Rel. No. 34-81207) (July 25, 2017), U.S. regulators have built the case through outreach and enforcement that digital assets are securities (regardless of the “technology, smart contracts, or computer code employed”) when these “virtual organizations or capital raising entities use distributed ledger or blockchain technology to facilitate capital raising and/or investment and the related offer and sale of securities.”
On September 11, 2018, the SEC filed its first-ever enforcement action against an unregistered investment manager of digital assets. The investment manager and its principal owner, Crypto Asset Management LP (“CAM”) and Timothy Enneking (“Enneking”), generally solicited via the Internet their digital assets fund to public customers without registering under the Securities Exchange Act as a broker dealer; they didn’t file a registration statement for the fund, or operate under an appropriate exemption; and, they didn’t register as an investment adviser. Accordingly, the SEC has claimed multiple willful violations of the Securities Exchange Act of 1934; the Securities Act of 1933; the Investment Company Act of 1940; and the Investment Advisors Act of 1940. It also didn’t help their cause that the Respondents also made demonstrably false statements while marketing, including their claim that the Crypto Asset Fund, LLC (“CAF”) was the “first regulated crypto asset fund in the United States” and that it had filed a registration statement with the SEC. They were fined $200,000.
On the same day, September 11, 2018, the SEC filed a similar first-of-its-kind public administrative and cease-and-desist proceeding against a self-proclaimed Internet-based "ICO Superstore" for operating as an unregistered broker dealer that “advertised, solicited, and sold securities” to retail investors, in the form of various digital tokens, using the TokenLot website platform (www.tokenlot.com). TokenLot LLC and its owners, Lenny Kugel and Eli L. Lewitt, agreed to $471,000 in disgorgement plus $7,929 in interest. “Kugel and Lewitt also agreed to pay penalties of $45,000 each and agreed to industry and penny stock bars and an investment company prohibition with the right to reapply after three years.”
There is a great deal of legal wrangling underway to close the summer of 2018 in the world of digital assets. The U.S. Congress has yet to act with legislation supporting the regulation of digital assets. Regulators, including the SEC, FINRA, and the CFTC have continued to create precedent by developing through speeches, guidance, outreach, and enforcement, the regulation of digital assets. In Brooklyn, on September 11, 2018 (oddly enough), U.S. District Judge Raymond Dearie ruled that federal prosecutors could continue to pursue a cryptocurrency fraudster under the federal Securities Exchange Act, effectively confirming for the first time that cryptocurrency fraud could fall under the U.S. securities laws, since it is the judge’s understanding that the SEC considers some cryptocurrencies to be securities.
Let SDDco Group help guide you through the process of working with the various regulators to create and maintain your own broker dealer or investment adviser to manage, broker, and issue digital assets.
Read More at: