SEC Co-Director of Enforcement Discusses Initial Coin Offering Misconduct, Emphasizes Need for Balance in Fostering Innovation

In a speech delivered this week, Stephanie Avakian, Co-Director of the Division of Enforcement at the Securities and Exchange Commission (SEC), discussed their approach to dealing with the avalanche of initial coin offerings (ICOs) and digital assets in general.

Avakian said that as of the Q2 of 2018, ICOs have raised over $16.7 billion, which compares to roughly $4 billion raised by ICOs in all of 2017. She said the market exuberance obfuscated the reality of these high risk, and at times fraudulent, investment opportunities. She cited the following examples:

  • The issuers may lack established track records.
  • They may not have viable products, business models, or the capacity for safeguarding digital assets from theft by hackers.
  • And some of the offerings are simply outright frauds.
As of the Q2 of 2018, ICOs have raised over $16.7 billion, which compares to roughly $4 billion raised by ICOs in all of 2017 Click to Tweet

Avakian said the Commission is sensitive to the legitimate need for innovation in financial services but said it was their duty to protect investors from these risky offerings. Avakian said the agency sought to balance the interests of both sides of the equation.

Following the oft cited DAO report and the creation of the SEC Cyber Unit, the SEC has taken several actions.

“Where the technology is merely a veneer for an alleged fraud, the Commission has taken enforcement action. For example, the Commission charged the three co-founders of Centra Tech, a purported financial services start-up, with orchestrating a fraudulent ICO that raised more than $32 million from thousands of investors.  The Commission also obtained court orders freezing the assets of Titanium Blockchain Infrastructure Services Inc. and AriseBank and, importantly, orders appointing receivers to identify and take control over the defendants’ digital assets.  These efforts are great examples of our work to preserve assets and protect investors.”

She mentioned the fact the SEC has suspended trading in nine different issuers when questions arose about firms that suddenly shifted to blockchain technology.

the SEC has suspended trading in nine different issuers when questions arose about firms that suddenly shifted to blockchain technology Click to Tweet

Their public statements regarding celebrity endorsements of ICOs, once a common promotional ploy, had the intended effect of halting these questionable promotions in their tracks.

But Avakian said they seek to be “thoughtful” as to how to handle ICO that do not involve acts of fraud.

“We want to recognize legitimate efforts to use new methods to raise capital, but we also want to make sure investors receive the information, and protection, they are entitled to under our laws.  The Commission’s settled order against a business called Munchee was an important step.  In that case, the Commission brought a non-fraud enforcement action against an issuer that, after the Commission’s DAO Report, conducted an unregistered securities offering through an ICO.  The Commission did not order Munchee to pay a penalty in that case because it cooperated quickly and refunded its proceeds back to investors.  Aside from Munchee, the Commission has brought other non-fraud cases against individuals who have taken advantage of public interest in blockchain technology with illegal stock sales that violate Section 5.”

Avakian added that the SEC is looking beyond just issuers of crypto pointing to the recent enforcement actions against a crypto hedge fund and the ICO Superstore.

Avakian said that ICOs have the potential to fundamentally alter the process by which issuers raise money. The SEC is thus focused on dealing with this emerging area of online capital formation.

“I am confident that the Commission will continue to play a leading role in bringing this new and emerging market within the umbrella of investor protection that the federal securities laws require.”

The speech is available here.

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