February 17, 2020

February 17, 2020

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February 14, 2020

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Enforcing the Regulatory Landscape for Virtual Currencies: Recent Developments


US regulators have stepped up their activity in terms of enforcing the regulation of virtual currencies and on September 11, 2018, issued four relevant decisions: FINRA’s first disciplinary action involving cryptocurrencies; the SEC’s first enforcement action regarding an investment company registration violation involving investments in digital assets; the SEC issued its first case charging unregistered broker-dealers for selling digital tokens, and the United States District Court for the Eastern District of New York ruled, in what is believed to be the first criminal case of its kind, that an initial coin offering may be deemed a “security” for purposes of federal criminal law.

In Depth

On September 11, 2018, US financial regulatory authorities and a New York Federal District Court were busy enforcing the federal securities laws against virtual currency companies. On that day, four important virtual currency-related enforcement decisions were delivered:

  1. The Financial Industry Regulatory Authority (FINRA) issued its first disciplinary action involving cryptocurrencies. In its complaint, FINRA alleged that Timothy Tilton Ayre (Ayre), the president and the largest shareholder of Rocky Mountain Ayre, Inc. (RMTN), a public company, attempted to lure public investment in RMTN by making fraudulent, positive statements about RMTN’s business and finances, and by issuing and selling HempCoin, a coin which Ayre publicized as “the first minable coin backed by marketable securities” and “the world’s first currency to represent equity ownership” in a publicly traded company. FINRA alleges that Ayre defrauded investors by making materially false statements and omissions regarding the nature of RMTN’s business, failing to disclose his unlawful distribution of HempCoin, and making multiple false and misleading statements in RMTN’s financial statements. Ayre is being charged under the federal securities laws with the unlawful distribution of an unregistered security since he never registered HempCoin, and no exemption to registration applied.
  2. The Securities and Exchange Commission (SEC) issued its first enforcement action regarding an investment company registration violation by a hedge fund manager based on its investments in digital assets. According to the SEC’s order, hedge fund manager Crypto Asset Management LP (CAM) and its sole principal, Timothy Enneking (Enneking), offered a fund that operated as an unregistered investment company. CAM, marketed falsely as the “first regulated crypto asset fund in the US”, had filed a registration statement with the SEC and raised more than $3.6 million. CAM was found to be engaging in an unregistered non-exempt public offering, investing more than 40 percent of its assets in digital asset securities, causing the fund to operate as an unregistered investment company. Eventually, CAM and Enneking paid a $200,000 penalty after agreeing to the SEC’s cease-and-desist order and censure without admitting or denying the findings against them.
  3. The SEC also issued its first enforcement action charging unregistered broker-dealers for selling digital tokens since the issuance of The DAO Report in 2017, which cautioned that those who offer and sell digital securities must comply with the federal securities laws. The SEC entered an order finding that TokenLot LLC, a self-described “ICO Superstore”, and its owners received orders from retail investors and handled hundreds of different digital tokens, which the SEC found included securities, without registering as broker-dealers. TokenLot and its owners promoted the company’s website as a way to purchase digital tokens during Initial Coin Offerings (ICOs) and engage in secondary trading, with most of its business occurring after the issuance of The DAO Report on the applicability of securities laws to digital assets. After being contacted by the SEC staff, TokenLot voluntarily winded down and refunded investors’ payments for unfilled orders. TokenLot and its owners were charged with violating the registration provisions in connection with their conduct.
  4. The United States District Court for the Eastern District of New York ruled that a jury may find that the investment opportunities provided by a defendant who offered virtual currency investment schemes and related ICOs may meet the definition of “security”. United States v. Zaslavskiy, No. 1:17-cr-00647 (E.D.N.Y. September 11, 2018). The SEC sued defendant Maksim Zaslavskiy (Zaslavskiy) for making materially false and fraudulent representations and omissions in connection with two purported virtual currency investment schemes and their related ICOs: REcoin Group Foundation, LLC (REcoin) and DRC World, Inc. (DRC). Zaslavskiy, who allegedly promised token purchasers profits from his companies’ investments in diamonds and real estate, moved to dismiss the indictment, arguing that the virtual currencies promoted in the REcoin and DRC ICOs are “currencies”, and therefore, by definition, not securities. As such, Zaslavskiy argued that the ICOs did not involve securities, and are beyond the reach of the federal securities laws. As a separate basis for dismissal, Zaslavskiy argued that the US securities laws are unconstitutionally vague as applied to cryptocurrencies, and are “void for vagueness”. The government asserted that the investments made in REcoin and DRC were “investment contracts”, and thus “securities”, as defined by both Section 3(a)(10) of the Securities Exchange Act of 1933 and Section 2(a)(l) of the Securities Act. The court rejected Zaslavskiy’s arguments, holding that a reasonable jury could conclude that the facts alleged in the indictment satisfy the Howey test, which determines whether certain transactions qualify as “investment contracts”, and that the laws under which Zaslavskiy was charged were not unconstitutionally vague “as applied to his conduct”. Ultimately, the court determined that “at this juncture, Zaslavskiy’s contrary characterizations are plainly insufficient to bypass regulatory and criminal enforcement of the securities laws,” and as a result, the case will proceed to trial.


Market participants should note the increased activity by the SEC and FINRA in their enforcement of regulation of virtual currency transactions. Similarly, recent court rulings such as in the Zaslavskiy case show that US courts are finding that an initial coin offering may be deemed a “security” for purposes of federal securities law. We will know the full implications of these interpretations and rulings over time, but they will certainly have wide-ranging market implications.

© 2020 McDermott Will & Emery


About this Author

David L. Taub, corporate attorney, Mcdermott

David L. Taub focuses his practice in the field of municipal derivatives, distressed municipal bankruptcy and financial technology (FinTech). David is head of the Firm’s Financial Institutions Advisory Practice and is a member of the Firm’s Management Committee.

With more than 30 years of experience representing leading financial institutions and other participants in the global capital markets, David is a widely recognized industry leader for his strategic advisory in innovative financial products and complex securitization transactions. His...

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Alexandra C. Scheibe, Mcdermott, corporate attorney

Alexandra C. Scheibe focuses her practice on representing financial institutions and financial technology companies in structuring and negotiating a broad range of derivatives, structured finance products, blockchain projects and all aspects of their blockchain token offerings as well as related regulatory and transactional matters. Alexandra is co-head of the Firm’s FinTech and Blockchain Practice Group.

Alexandra specializes in structuring and negotiating transactions involving financial services and technology companies, and has focused on the use and implementation of blockchain technology in platforms for derivatives, structured finance and securitization. Alexandra advises a wide range of market participants across multiple industries, including early-stage and established companies developing blockchain solutions, investors, exchanges, broker-dealers, banks and consulting firms, on the legal and regulatory implications of ICOs, including securities, commodities and money-transfer issues, custody, money service business registration requirements, and SEC and CFTC regulatory inquiries, as well as on state and international regulation. She also assists financial services firms and others in negotiating technology agreements for all types of services in light of the constantly evolving regulatory issues arising from the use of blockchain and other technologies.

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Thomas P. Conaghan, Mcdermott Will Emery law Firm,  (M&A), joint ventures, strategic investments, spin-offs,

Thomas P. Conaghan is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s Washington, D.C., office.  Tom represents both publicly held and closely held businesses, underwriters and other sources of capital, corporate boards and board committees and corporate executives.  He advises both U.S. and foreign-based public companies on issues relating to public and private offerings of securities, disclosure, periodic reporting, corporate governance, executive compensation, the rules of the New York Stock Exchange and the Nasdaq Stock Market and compliance with the...

Eyal Peled, Securities lawyer, McDermott

Eyal Peled focuses his practice on corporate securities matters. He represents domestic and foreign companies in public offerings and private placements. Eyal has been involved with a variety of complex corporate, securities and finance transactions, and is highly skilled in handling SEC filings and compliance matters. 

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