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March 22, 2018

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Enforcement Actions Launched by Securities and Exchange Commission – Heightened Scrutiny of Blockchain and Cryptocurrency Companies

A recent flurry of activity by the Securities and Exchange Commission in court, and strong talk on the Hill, gives a clear indication that the U.S. regulatory agency is making a significant push to reign in the current wild-west atmosphere of investments in Blockchain and cryptocurrency companies.

In the wake of the DAO Report issued by the SEC in July 2017, the agency released several Investor Alerts to warn the public of the risks associated with investing in initial coin offerings (ICOs), including an alert to warn investors to be careful about advertisements by celebrities promoting ICOs and other Blockchain-related investments.  Moreover, the SEC chairman, and his counterpart at the Commodity Futures Trading Commission (CFTC) have recently released statements, op-eds and appeared before the U.S. Senate Banking Committee to elevate the awareness of lawmaker and the public to some of these risks.

These efforts have been categorized as to the intended audience.  For “Main Street” investors, the SEC and CFTC seek to ensure that all potential investors are made aware of the risks involved prior to purchasing a cryptocurrency or investing in a Blockchain-based company.  For the “Market Professionals” advising companies on ICOs and related transactions, the message is clear – do not to try to evade SEC and CFTC regulations by calling the investment vehicle a “utility token” or registering solely a money transferer at the state level.  SEC Chairman Jay Clayton went so far to say that he has not reviewed an ICO that has not raised concerns that the offering was a security.

Recent enforcement actions

To that end, there are have been a number of enforcement actions over the past few months that illustrate the SEC and CFTC’s growing awareness and willingness to step in when necessary.

For example, on January 30, 2018, the SEC obtained a court order that halted AriseBank’s allegedly fraudulent ICO following AriseBank’s use of various publicity tactics to target and raise funds from retail investors. Co-Founders Jared Rice Sr. and Stanley Ford described AriseBank as the world’s first “decentralized bank,” stating that AriseBank offered FDIC-insured accounts and transactions, as well as services using hundreds of virtual currencies. The SEC’s complaint alleges that AriseBank made materially false statements and omissions by claiming to offer FDIC-insured accounts, as well as failing to disclose the criminal background of Rice, who is on probation for felony theft and tampering with government records. The SEC also alleges that the ICO is an illegal offering since AriseBank had not filed a registration statement, and no applicable exemption from registration applied. Notably, this halt presents the first time the SEC has utilized a receiver to secure investors’ cryptocurrencies in connection with an ICO fraud. The SEC seeks disgorgement of ill-gotten gains and benefits, and bars against Rice and Ford to prohibit them from offering digital securities in the future.

Subsequently, the SEC suspended trading in Cherubim Interest, Inc., (CHIT) on February 16, 2018, along with, PDX Partners, Inc. (PDXP), and Victura Construction Group, Inc. (VICT) after the three “penny stock” companies issued press releases claiming that the companies had acquired AAA-rated assets from “NVC Fund.” NVC Fund is a private equity fund that claims to invest in various cryptocurrency and blockchain technology. The SEC’s order of suspension states that the SEC is concerned with the accuracy of the information in the three companies’ press releases. Specifically, the three companies claim to have purchased trust amounts totaling approximately $700 million dollars. However, the three companies appear to have posted negative cash flows and operating incomes since the end of 2016. CHIT was also cited by the SEC as being delinquent in its filings with the SEC. Industry observers have also raised suspicions around the fact that all three companies list Patrick J. Johnson, a former NFL wide receiver, as their CEO. The SEC warned investors that they should be weary of penny stock companies attempting to take advantage of the latest business trends by claiming to invest in cryptocurrency and blockchain technology. Trading in stock of the three companies is suspended until 11:59 p.m. EST, on March 2, 2018.

Then, on February 21, 2018, the SEC charged BitFunder and its founder, Jon E. Montroll, with operating an unregistered securities exchange, defrauding users, and making false and misleading statements. Montroll launched BitFunder in 2012 as a platform to allow users to deposit bitcoins into a virtual wallet via the WeExchange platform. Users then invested the funds in their WeExchange wallet in various virtual-currency related businesses. The SEC complaint alleges that Montroll misappropriated funds by withdrawing 4,968 bitcoins from users’ WeExchange wallets, and then used the funds for his personal expenses and accounts. The SEC’s complaint also alleges that Montroll offered unregistered online securities through his BitFunder platform, and then used investor’ funds to replace previously misappropriated user bitcoins. Lastly, the complaint alleges Montroll failed to disclose a cyberattack on BitFunder that resulted in the loss of 6,062 bitcoins, and the inability of BitFunder users to withdraw their bitcoins from the WeExchange wallet. Montroll shut down BitFunder in November of 2013, following the cyberattack. The SEC seeks permanent injunctions against BitFunder and Montroll, as well as disgorgement of ill-gotten gains.

Finally, several news outlets have reported that approximately 80 cryptocurrency companies received subpoenas in the past two week from the SEC.  According to the press reports, the subpoenas are requesting information on the ICOs associated with the companies, and one cryptocurrency fund – TechCrunch – confirmed receipt of a subpoena.

It is not clear whether the subpoenas and the other enforcement actions will bring an immediate cessation to ICOs or other cryptocurrency and Blockchain investment offerings, but several have already been put on hold until it becomes clear what approach the SEC will be taking.

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About this Author


Daniel L. Walbright assists major hospitals and health care systems with issues including federal and state fraud and abuse compliance. His experience includes researching and drafting memoranda, conducting due diligence review, and drafting legal motions. Daniel has also worked with corporate clients, assisting with matters including private stock acquisition, Stark Law claims, joint ventures, defamation claims and OIG compliance issues.

During law school, Daniel interned for the Carle Foundation Hospital in Champaign, Illinois. In this role, he...

Lee G. Petro, Telecommunications, Mass Media lawyer, Drinker Biddle
Of Counsel

Lee G. Petro represents broadcasters, telephone companies and wireless service providers before the Federal Communications Commission. He has represented broadcasters and fixed wireless broadband service providers in the issues faced by their transition to digital and to two-way broadband service. Lee also works with clients who need counseling on matters of construction benchmarks, build out, rights of way, tower leasing and siting and implementation of services more generally. He lends his experience to clients seeking to lease their spectrum excess capacity and to transactions designed to accomplish that goal consistent with regulatory requirements. Lee also routinely works on transactional matters for a range of communications clients, including preparation of asset purchase agreements, spectrum leasing arrangements and interference reduction agreements. He also prosecutes trademark applications before the Patent and Trademark Office on behalf of his telecommunications clients, and has represented clients before the Antitrust Division of the Department of Justice relating to merger and acquisition issues.