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Business Litigation Alert: "SEC Cracking Down on Cryptocurrency Scams"

Cryptocurrency (e.g. Bitcoin) seems to be in the news on practically a daily basis, with people racing to get in on the latest investment trend and companies investigating how to best incorporate cryptocurrency and block chain technology into their business model.

However, the hyper level of excitement has also generated serious concerns about the lack of meaningful regulations in this area, especially as companies are increasingly looking to Initial Coin Offerings (ICOs) as a way of raising money.

The SEC has started to take action.  On Tuesday, January 30, the agency reported that it had obtained a court order halting the ICO of Dallas-based AriseBank.  According to the SEC, AriseBank was trying to raise $600 million by selling the “AriseCoin” cryptocurrency, with the proceeds to be used to establish AriseBank as a first-of-its-kind “decentralized bank” offering a variety of consumer banking products and services.  Additionally, the SEC claimed that AriseBank’s principals represented that they had developed an algorithmic trading application that automatically trades in various cryptocurrencies.

According to the SEC, AriseBank is actually “an outright scam” and its principals materially misrepresented the true nature of the company, failed to disclose the criminal background of “key executives,” and lied about previously acquiring an FDIC insured bank holding company.

Is any of this really surprising?  No.

The key takeaway is that the SEC is going to keep an eye on companies trying to capitalize on “cryptocurrency” and block chain technology.  As the SEC stated in its January 30 press release, “Attempting to conceal what we allege to be fraudulent securities offerings under the veneer of technological terms like ‘ICO’ or ‘cryptocurrency’ will not escape the Commission’s oversight or its efforts to protect investors.”

The bottom line is that companies should tread carefully when looking at incorporating anything cryptocurrency related into their business or face potential investigation and action from the SEC.  There is also a cautionary tale for investors/consumers as the SEC continues to take down these ICO scams – buyer beware and conduct extensive due diligence before any investment, especially one that seems too good to be true!

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