Investors who invested in Initial Coin Offerings (ICOs) or purchased “digital tokens” may be wondering whether their investment is governed by any laws. Likewise, investors may be wondering if they have any recourse when they expect fraud or the ICO disclosures failed to provide material information.
The answer to both questions is yes. The Securities and Exchange Commission (SEC) classified tokens from ICOs as securities in December of 2017, announcing that "a token constituted an investment contract and therefore was a security under our federal securities laws.” As designated securities, these laws require ICOs to register their tokens with the SEC, make proper disclosures, and file periodic reports.
The SEC recently enforced securities laws against companies conducting unregistered initial coin offerings. On December 18, 2019, the SEC announced it settled charges against blockchain technology company Blockchain of Things Inc. (BCOT) for their unregistered initial coin offering of digital tokens. The settlement order requires BCOT to cease and desist from committing or causing any violations of the federal securities laws and imposes a $250,000 penalty. BCOT must also return funds to those investors who request a return of the funds used to purchase tokens in the ICO. The settlement also requires the company to register its tokens as securities pursuant to the Securities Exchange Act of 1934 and to file required periodic reports with the Commission.
On February 19, 2020, the SEC announced it settled charges against another blockchain technology startup, Enigma MPC, for conducting an unregistered offering of securities in the form of an initial coin offering. Enigma, based in San Francisco and Israel, has agreed to return funds to harmed investors via a claims process, register its tokens as securities, file periodic reports with the SEC, and pay a $500,000 penalty.
As these cases demonstrate, ICOs are not exempt from the law. As the cryptocurrency industry continues to expand, it is imperative that investors are aware of their rights when choosing to purchase these securities. If you believe you were harmed by a fraudulent or misleading initial coin offering, or the misleading sale of digital tokens, contact Cotchett, Pitre & McCarthy to learn more about your rights.
Tyson Redenbarger is a Partner at Cotchett, Pitre & McCarthy LLP practicing in a wide range of civil litigation areas including class actions and complex civil litigation. In 2022, Tyson was listed by the Daily Journal as one of the ...