SEC Probe Reactions: At Least 80 Firms Receive Subpoenas

The US Securities and Exchange Commission (SEC) has reportedly subpoenaed 80 crypto firms, including Overstock.com’s ongoing $250 million initial coin offering (ICO) and TechCrunch founder Michael Arrington’s $100 million cryptofund.

The regulatory action comes after the SEC continually warned companies that many tokens created by ICO issuers were, in fact, unregistered securities and may violate securities law.

One of the first companies to face the large-scale investigation of the SEC was online retailer Overstock with its ambitious tZERO project that is set to disrupt existing capital market and replace Wall Street with a blockchain token trading system.

In a recently issued regulatory filing, Overstock confirmed that its ongoing $250 million tZero ICO has been under review by the SEC since February. However, Overstock denied the awareness of a legal proceeding that would have an “adverse impact” on its business. The filing itself states that the investigation does not have to create any negative segment in company’s reputation, but Overstock saw its stock fall more than 10 percent following the SEC probe.

In the SEC filing, Overstock said the regulator requested that the company voluntarily provide certain documents related to the offering and the tokens in connection with its investigation.

“The SEC is trying to determine whether there have been any violations of the federal securities laws, the investigation does not mean that the SEC has concluded that anyone has violated the law. Also, the investigation does not mean that the SEC has a negative opinion of any person, entity, or security,” the filing reads.

tZero president Joseph Cammarata said the team of Overstock is happy that the SEC is scrutinizing the space. He also confirmed that tZero has concluded its ICO pre-sale after raising $100 million, and has initiated its subsequent fundraising round.

The SEC also subpoenaed TechCrunch founder Michael Arrington’s cryptofund, coming a day after Overstock revealed that its ICO has been under review by the regulator. In November 2017, Arrington announced he was raising $100 million for a hedge fund called Arrington XRP Capital.

“We received a subpoena. Every [crypto]fund I’ve talked to has received one,” Arrington said in a phone interview with CNBC on Thursday. “That’s fine. They just have to figure out what they want. They need to set up rules so we can all follow them, and the market is begging them for that.”

Arrington also called the shotgun action by the SEC a shame – as ICOs will just vote with their feet and move offshore thus depriving the US of highly desirable crypto innovation.

In his Twitter post on Friday, however, Arrington clarified his statement to indicate he received the subpoena as an individual for a deal he invested in last summer, and as far as he is aware, he has never publicly mentioned the company. He added that he did not believe this was about investors breaking the rules.

According to a source, the inquiry stretches back as far as last fall and that as many as 80 subpoenas have been sent out.

Jason Gottlieb, a partner at law firm Morrison Cohen representing PlexCorps, whose assets the SEC froze after alleging its “scam” ICO was actually a sale of unregistered securities, said SEC offices in New York, Boston and San Francisco has issued subpoenas.

“Clearly it’s a coordinated, grand investigation. I would expect it’s going to continue throughout this year,” Gottlieb said

Gottlieb added that he sees the SEC probe as ending up with a “hodgepodge of court decisions,” and believes that the Supreme Court may end up deciding the cases coming out of the probe.

Financial regulators around the world have approached cryptocurrencies in different ways. Japan licensed cryptocurrency exchanges in April 2017. China banned ICOs in September 2017, while South Korea banned anonymous trading accounts in late January.

William Mougayar, a blockchain investor and the author of a book, “The Business Blockchain,” said he hopes the SEC doesn’t classify tokens, since it would be a “slippery slope.” He added that it would make more sense to focus on well defined disclosures without being overly restrictive.

Reactions continue to pour in on the US Securities and Exchange’s actions, which saw a broad swatch of cryptocurrency companies receive subpoenas and requests for information from the regulator.

Block Tribune asked the industry for their take on what’s going on and what may happen next.

Nicholas Morgan, Attorney, Paul Hastings, former SEC staffer:

1)  Will the SEC subpoenas and requests for information have any chilling effect on the blockchain business?

ANSWER: The impact will be muted for a couple of reasons.  Blockchain is obviously broader than ICO, and the regulators have praised the blockchain concept even as they have sounded the alarm about ICOs.  Many in the ICO space appear to have a libertarian impulse:  move quickly and address regulatory issues after scaling up.  Finally, the ICO concept has attracted issuers and investors from outside the SEC’s jurisdiction.  Stronger actions by the SEC may simply move the concept elsewhere as a result of regulatory arbitrage.

2)  What do you think the end game is on this probe – will it mean substantial fines, businesses closing, possible jail time or other sanctions for advisors or corporate officers?

ANSWER:  We will see more of the same of what the SEC has done to date:  fraud claims against ICO issuers for misrepresentations to investors in whitepapers and elsewhere; non-fraud claims against ICO issuers for failing to register offerings or fit within an exemption to registration.  But we’ll also see new types of claims:  unregistered broker claims against those selling tokens for issuers, “scalping” claims against promoters, and claims against investment advisers and attorneys.

“Keep your eye out for novel applications of old SEC tools in the secondary market for tokens:  market manipulation claims such as “pump and dumps” and, what would be truly remarkable: insider trading in tokens.”

Mark Toohey, Founder and CEO of TBSx3:

1. Will the SEC subpoenas and requests for information have any chilling effect on the blockchain business?

ANSWER: In the long-term this is a very positive move. We are building an industry and there is no place for dishonest or incompetent operators. Solid, well-run businesses have nothing to fear. The laws that govern corporate malfeasance exist for very good reasons – having been built up over the decades in response to the bad actions and conspiracies of rogue actors.

Launching a blockchain business is not just about the aspirations of the entrepreneur. Investors play a crucial role in helping fund those ideas and inventions. The rights of the investor need to be fully respected and protected. The existence of a safe investment environment will have a positive effect of our industry.

The key word in this question is “business”. A well-governed business that honestly explains their business to investors, sets out the investment risks (and then uses the funds in the manner described) should have little to fear from regulatory scrutiny.”

2. Will you be more or less likely to have an office in the US if the SEC gets tough on ICOs?

ANSWER:  A tough stance on rogue ICOs is exactly what we should expect, and need, from regulators. That can only help build a solid, well-governed industry that sustains great new products and services, provides interesting jobs, and gives investors a fair return for making that possible.

Regulators in the US have been less flexible than their counterparts in the U.K. or Europe where there has been a more ‘wait and see’ approach. This harder attitude seems to be thawing with some US regulators expressing an interest in making greater use of regulatory sandboxes. The ability for new business models to be tested in a controlled environment under the helpful gaze of regulators will help drive innovation.

Positive innovations deserve all the regulatory flexibility and funding they can get. I’d much prefer a crackdown on rogue elements and scammers so good projects get funded instead of the precious investment money pouring down a rat hole.

The US can do more to be flexible and responsive to innovation, but they should not limit this move against scammers.

3.  What do you think the end game is on this probe – will it mean substantial fines, businesses closing, possible jail time or other sanctions for advisors or corporate officers?

ANSWER: The results will vary depending on the circumstances. It could involve fines, shutdowns, or even jail time where criminal acts are proven in court. Assets could also be confiscated if they are found to be the proceeds of crime.

The SEC‘s focus on the culpability of legal advisers who gave inadequate or negligent advice is also appropriate. Having made digital currency a core part of my legal practice for the past six years, I know there are a number of lawyers who are dedicated to building and supporting this new industry. However, with the recent crypto-hysteria, I have been stunned to see the rapid emergence of overnight legal experts spruiking their wares at conferences and advising clients.

They may well find that some lawyers neither understood the technology nor the legal implications of the paths they advised clients to take (or that they did not strongly advise their clients not to take). Cryptocurrency and blockchain have, and will continue to, spawn numerous valid and credible new businesses. The industry needs lawyers who understand the complexities of the law that are addressing.

Daniel Alexiuc, CEO, Living Room of Satoshi:

1. Will the SEC subpoenas and requests for information have any chilling effect on the blockchain business?
ANSWER: 1I welcome the SEC actions, and have been predicting it for a long time. I believe that many (if not most!) ICOs have been operating as unregistered securities, and have been defrauding and misleading investors. More regulation is definitely needed when it comes to ICOs.

2. Will you be more or less likely to have an office in the US if the SEC gets tough on ICOs?

ANSWER:  The SECs action regarding ICOs will have no impact on our decision to open an office in the US. True decentralised cryptocurrencies like Bitcoin have no relationship to ICOs, and the cryptocurrency industry will be happy to have those associations removed.

3.  What do you think the end game is on this probe – will it mean substantial fines, businesses closing, possible jail time or other sanctions for advisors or corporate officers?

ANSWER:  If it’s anything like the punishments handed out for similar fraud in other securities markets, I believe it could be severe, including substantial fines and jail time.

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