In October Yahoo Finance and Decrypt the Media published a joint report which says that the Commission on securities and stock exchanges of the USA (SEC) has tightened the prosecution ICO, putting at risk, «hundreds» of projects. Thus, according to the document, dozens of companies are «quietly agreed» to return the investor’s funds and pay the penalties instead of trying to reach agreement with regulatory requirements. Yahoo and Decrypto noted that the crypto-space, there is still no regulatory clarity and the Commission «is not going to provide it». November 16, the SEC issued a statement about the digital assets is one of the few such documents since the time of the report DAO — but experts doubt that he will clarify the situation and make life easier for players in the crypto-sphere. What’s the mood with the SEC and with what projects the Commission figured out in November, tells DeCenter.
November 16, the SEC issued a decree on the results of the investigation in respect of projects AirFox and Paragon. The Board found that the company was selling unregistered securities. Now they are required to register the tokens in accordance with the law, pay a fine of $250,000 and meet the requirements for reimbursement of investor funds if any.
The financial services company Airfox and blockchain startups in the marijuana industry, Paragon spent tocancel last year. Airfox has raised $15 million for the creation of a mobile application that will allow users to monetize clicks on the ads and Paragon to develop their own platform, raised $12 million.
The company agreed to pay fines to register their tokens as securities and make periodic reports to the SEC and to return any funds to the affected investors.
SEC declares that encourages technological innovation on the capital market, but simultaneously emphasizes that «market participants must adhere to well-established and well-functioning legal boundaries, working in the field of technological innovation, regardless of, securities are issued in certificated form or using new technologies such as the blockchain». «We’re clear that companies that issue securities through the ICO must comply with laws and regulations and rules governing registration of securities. These cases show those who wanted to do something like that, that we continue to monitor the violations of the Federal securities laws in respect of digital assets,» commented Stephanie Avakian, one of the leaders of the Department of law enforcement SEC.
This is the first case of application of measures grazhdansko-legal responsibility in respect of the ICO projects from the SEC, and some experts consider it an important milestone in the history of crypto-regulation.
«What we see is a simple development of what was supposed to happen. Regulators always interfering… Coming global tough measures, — says David silver, a lawyer in the area of securities fraud and investment losses. The government was not going to be afraid of groups of libertarians and anarchists. In the next two years we will see more than just enforcement actions.»
However important or even turning date 16 November was not the only reason. On the same day, the SEC summed up its current position on the activities of crypto-projects in the «Statement of issue and trade digital securities.» «Today marks the end of what I would call the «first part» law enforcement strategy of the SEC, commented on the emergence of this guide, Jake Chervinsky, counselor of the state service for trials in the field of securities. This is the first [statement SEC] since the speech of the Villa Hinman, who said that bitcoin and ether are not securities because they are “fairly decentralized”. It covers all recent SEC actions against industry players: ICO, exchanges, brokers, funds. And that’s why I call it the end of the first phase. It seems that SEC has prepared this statement for almost a year. They are strategically pursued several of the members of each group to make this statement as a guide for the rest.»
Czerwinski believes that the SEC uses the «classic strategy, known as «leadership through coercion, which leaves the regulator for freedom of action. About the same strategies the SEC wrote mark santori, a lawyer and the author of the concept of SAFT, in December last year, when the SEC announced its decision in the case of Munchee: «We will see more [cases] of leadership through coercion by the SEC. Fortunately, the Commission continues to act rationally and to consider these as «teachable moments» for these [projects] as Munchee, which in fact are not criminals».
Czerwinski notes that the Commission acts in the interests of reputation that might be good for her but bad for crypto projects that need clarity and clear legal framework: «SEC rarely wants to test uncertain legal theories in court. If they lost a big case, such as whether the tokens of securities is to undermine their law enforcement strategy for the entire industry. [A] the best way to avoid this? Leave the rules vague and ambiguous». For this reason, according to Chervinski, the latest statement by the SEC still does not explain clearly enough how the securities law should apply to digital assets «In the statement of the question is: «When the digital asset is a security?». The only answer there is: «See report for DAO», despite the fact that it was released about 16 months ago.»
«Even less help» this statement makes the issue of decentralized exchanges — whether they are subject to Federal regulation, said Czerwinski. «It says that it depends on «relevant facts and circumstances.» In legal language this is equivalent to «[we] are not sure, don’t touch us»». «A business that provides a marketplace that unites buyers and sellers of securities, regardless of the technology used, must determine whether its activities under the definition of exchange under the Federal securities act. In rule 3b-16 of the act the exchanges of the given functional test to assess [this]», — it is told in statement SEC. In fact, it is the analogue of the Howey test to stock exchanges, and it is likely that the criteria will cause the crypto-projects less than criteria of the Howey test.
Another question which is set Czerwinski and which, in his opinion, explained in a Declaration how far the sphere of influence of the SEC. «Many companies react to regulatory uncertainty in the US, trying to get out of the reach of the SEC. But whether the SEC will hunt for the ICO and foreign exchanges that do not allow participation of American citizens? «[We] don’t know [do not touch]»,» — commented cerwinske.
In this case, as previously, the SEC remains open to direct appeals from the specific projects: «Consult your legal advisers regarding application of securities laws and to contact the Commission staff if you require assistance,» the statement said. «The path to regulatory compliance is, even when issuers have conducted illegal unregistered offer digital securities,» — this phrase from the statement of the SEC gives even more hope, pointing out that the SEC is ready to understand the projects that may not because of criminal intent, but because of the ambiguity of the regulations, incorrectly interpreted the character tokens sold and agree to pay a fine and continue to cooperate with the SEC.
Czerwinski notes that coming now to the second phase of regulation will be likely even more difficult for the crypto-space: «If I’m right, «phase two» not fun — it [is] a slow, painful grinding, in which the SEC cleans the crypto space every decision. In a sense, this is the right approach. To establish laws is not really the work of the SEC — the clarity must come from Congress. And if you’re tired of hearing on regulation and enforcement, I regret to inform you that this is only the beginning. The securities laws is only one part of a crypto-puzzle. We will go through this again with the tax laws, about money laundering, about the [bypass] sanctions and so on. I’m sorry.» Thus, in his opinion, the regulation in the second phase to actively connect the other departments, in particular the Commission commodity futures U.S. (CFTC) and IRS (IRS).
If you believe the «theory phase» Chervinsky, the completion of the first phase of crypto-regulation are the following events:
In early November, the Enforcement Department of the SEC has published the annual report for the 2018 fiscal year, which shows that since the formation of Kiberprestuplenie inside SEC (at the end of the 2017 fiscal year), the Commission is increasingly engaged in the identification of fraudulent activity in cyberspace, which includes the activities of ICO projects. «Over the past year the Department has opened dozens of investigations into ICO and digital assets, many of which [proceedings] are continuing». The SEC highlighted cases Centra Tech, Titanium Blockchain Infrastructure Services and PlexCorps, which together got tricked more than $68 million of investor funds. According to the SEC report, the total amount of fines imposed by the Commission for the 2018 fiscal year amounted to $3.94 billion, of which $3.04 billion and accounted for 5% of the cases.
November 8, the SEC charged the Zachariah Coburn, founder of the exchange EtherDelta, which was not registered as a trading platform. The platform allowed the exchange of tokens of the standard ERC20, and, according to the SEC, within 18 months of its existence the exchange was located more than 3.6 million warrants of tokens, including those that were securities. The statement also draws attention to the fact that most of the orders were made after the Commission has published a report investigating the DAO in June 2017. The regulator said that the founder of the exchange, Coburn has not confirmed nor denied the charges but agreed to cooperate and pass the state $300,000 of illegal profits and to pay a fine in the amount of $75,000 and $13,000 as interest for the period before judgment. The SEC notes that the penalty would be greater if Coburn refused to cooperate.
On 15 November The Wall Street Journal reported that the SEC is investigating a $50 million tocancel the company crypto-loans Salt Lending Holdings Inc. «Sources familiar with the situation» said that the company received a summons in February. She was suspected of selling unregistered securities and the Commission finds, as was used collected in the course of licensee means and in what form the Salt staff received tokens. The trial for the SEC and the CEO platform ShapeShift Eric Voorhis, who previously was a member of the Board of Directors of the Salt despite the fact that in 2014 the SEC banned him from any fundraising activity. Will Voorhies to cooperate with the investigation, is unclear, but his previous statements say not that good. «All these stories about what the government is trying to protect people — a complete nonsense,» the businessman said during a summer interview with The Wall Street Journal.
On 15 November, Federal prosecutors in new York announced that Maxim Zaslavsky, founder of ICO projects REcoin Group Foundation and Diamond Reserve Club World, suspected fraud and deception of investors, pleaded guilty to «[engage] investors in the purchase of tokens through fraud in the form of statements about what they are backed by real estate and diamonds». In fact, the certificate that he sent to investors, were not associated with bloccano, and any supporting assets did not exist.
Recall that the case of the Zaslavsky became the first SEC about ICO fraud. The Commission has charged a businessman at the end of September 2017, and demanded the return of collected during the ICO funds and to pay a fine.
Zaslavsky previously insisted that existing laws against cryptocurrencies «unconstitutionally vague» and tried to dismiss the charges against him, claiming that he created crypto-currencies were not securities. However, this argument was rejected by a Federal judge in Brooklyn in September. Judge Raymond Deary decided that RECoin and Diamond are securities. «A deliberate lie Zaslavsky and others led unsuspecting investors to buy worthless certificates [while they] thought that they acquire cryptocurrency securities. This office will continue to aggressively pursue those who use and deceive investors, whether in the form of traditional methods of fraud with securities or new — such as the alleged proposals of cryptocurrencies and blockchain-technologies», — said the lawyer court southern district of new York Richard Donohue.