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New SEC Cyber Unit Obtains Emergency Action Against ICO

On December 4, 2017, the Securities and Exchange Commission’s (“SEC”) new Cyber Unit obtained an emergency asset freeze to halt a Canadian initial coin offering (“ICO”) called PlexCoin that had raised up to $15 million from thousands of investors.  The SEC filed its complaint (“Complaint”) in the Eastern District of New York, alleging that the sponsor and his company, PlexCorps, marketed and sold securities to investors in the U.S. and elsewhere under a variety of false pretenses, including that PlexCoin would yield a 1,354% profit in less than 29 days.  The complaint seeks permanent injunctions, disgorgement plus interest and penalties.

The SEC’s action against PlexCoin follows actions begun by Canadian regulators several months ago.  In July 2017, the Quebec Autorité des marchés financiers (“AMF”) determined that PlexCoin was a security, relying in part on the seminal United States securities case SEC v. Howey.  The Quebec Financial Markets Administrative Tribunal (the “Quebec Tribunal”) in response to the AMF’s determination had ordered the cessation of PlexCoin solicitations and the shutting down of PlexCoin and PlexCorp websites.  The SEC complaint noted that not only did PlexCoin’s promoters defy the Quebec Tribunal, they expanded their solicitations to U.S. investors based on fraudulent and unsubstantiated representations and established banking accounts in multiple countries (including the United States) under misleading pretenses.

Per the SEC’s press release, the Cyber Unit was created in September 2017 “to focus the Enforcement Division’s cyber-related expertise on misconduct involving distributed ledger technology and initial coin offerings, the spread of false information through electronic and social media, hacking and threats to trading platforms.”  In addressing PlexCoin, Robert Cohen, Chief of the Cyber Unit, stated “This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing.”

We expect the Cyber Unit will proactively bring additional enforcement actions in the ICO marketplace in the near future.

For more information, see the accompanying SEC Press Release.

Copyright 2017 K & L Gates

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About this Author

Crea, Counsel, SF
Of Counsel

Robert M. Crea counsels investment advisers, private fund managers and broker-dealers on a variety of fund formation, regulatory and compliance, and securities law matters. He regularly works with clients to structure and document U.S. and offshore private investment funds and assists clients with a variety of state and federal regulatory and compliance issues. He represents pension plans and other institutional investors in connection with their investments in hedge funds, private equity, venture capital and real estate funds. 

Mr. Crea also...

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Evan Glover, KL Gates Law Firm, Finance Attorney
Associate

Evan Glover is an associate in the firm’s Pittsburgh office, where he is a member of the Investment Management, Hedge Funds and Alternative Investments practice group. Mr. Glover also advises clients on litigation matters relating to disputes involving financial institutions and financial services.

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