While many questions around how existing securities law apply to initial coin offerings remain unanswered, the Securities and Exchange Commission has always made one thing clear: do not engage in fraud.
On Monday, its new Cyber Unit, created in September to, among other things, regulate ICOs, took its first action, against PlexCoin, which promised investors a more than 13x return within a month.
It obtained an emergency asset freeze against Dominic Lacroix, whom it called a "recidivist Quebec securities law violator," his partner Sabrina Paradis-Royer and PlexCorps. It also filed charges against LaCroix and PlexCorps alleging that they sold securities claiming investments in PlexCoin would bring profits of 1,354% profit in less than 29 days.
Since August, PlexCoin had raised $15 million from investors both in the U.S. and beyond. According to Coinmarketcap, the price plunged from 15 cents Sunday to as low as 5 cents Monday.
"This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing," said Robert Cohen, Cyber Unit chief, in a statement. "We acted quickly to protect retail investors from this initial coin offering's false promises."
Longtime players in the crypto space view the action positively. The ease with which a team could raise a staggering amount of money through an ICO began to draw unsavory characters who preyed upon everyday investors with a fear of missing out on the next Bitcoin or Ethereum but little understanding of the technology.
The amount of money raised in ICOs in 2017 is about $3.5 billion, compared to $295 million in all previous years combined, according to CoinDesk.
"Many token sales are outright securities fraud that differ little from a typical pyramid or Ponzi scheme," said Peter Van Valkenburgh, research director for blockchain advocacy Coin Center, which has been at the forefront of contending with how the technology interacts with existing legal frameworks. "We're happy to see the SEC carefully separating the wheat from the chaff with respect to these ICOs, investigating and putting a stop to predatory offers that promise exorbitant returns and guarantee investors won't lose money."
The SEC's action against PlexCorps is yet another sign the commission intends to fulfill its mission to protect investors in this new area of finance. In July, it released a report stating that DAO tokens, a type of crypto token that are now defunct, fit the hallmarks of a security but stated that each determination would be based on the facts and circumstances of the offering.
Since then, the agency has warned investors against throwing money into ICOs promoted by celebrities potentially unlawfully and publicly listed companies that touted involvement with cryptocurrency or ICOs to lure investors to their stocks.
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