While these new digital currencies are helping some pioneering investors gain quick wealth, federal authorities are warning about their potential for fraud.
The Securities and Exchange Commission has warned investors to be on the lookout for “potential scams” involving Initial Coin Offerings.
ICOs are sometimes called “crowdsales” and function similarly to an Initial Public Offering on the stock market, but without the governmental regulation. They typically receive investments in the form of cryptocurrency in exchange for shares known as tokens. ButICOs can be for any sort of startup — they don’t necessarily have to be for cryptocurrency companies.
The SEC’s newly created Cyber Unit has started to take action on “pump and dump” schemes where fraudsters lure investors, take their money, and run.
The agency declined to comment specifically about the prevalence of fraud, but Todd Kornfeld, an attorney who specializes in financial regulations as well as ICOs and blockchain technology, said the feds are looking for obvious fraudsters.
“So far, the cases that have attracted regulatory scrutiny and enforcement actions appear to be blatant, outright frauds where apparently there were never any intentions of actually delivering a product or service, or so it has been alleged,” Kornfeld said.
On December 4, the SEC said it froze the assets of PlexCorps, a company that was running an ICO for its own cryptocurrency called PlexCoins. It marked the first action from a newly created Cyber Unit inside the SEC that’s looking to combat digital fraud.
The agency filed civil charges against Dominic Lacroix, his partner Sabrina Paradis-Royer and PlexCorps, for “misappropriating investor funds illegally raised through the fraudulent and unregistered” offer of PlexCoin. Before they were shut down, the ICO had raised nearly $15 million from thousands of investors since August by allegedly making false promises for a 13-fold profit in less than a month.
“We intend to contest this case not in the media but in a court of law,” said Jason Gottlieb, a lawyer for Lacroix and Paradis-Royer. “Once the court appreciates the facts and the applicable law, I am confident the court will come to see this case differently than the SEC has presented in its papers to date.”
The SEC complaint says Lacroix is “the subject of numerous proceedings related to fraudulent securities activities in Canada.”
In cases that are not so obvious, the agency said that investors can run free background checks on ICO providers through BrokerCheck on the Financial Industry Regulatory Authority’s website…