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SEC Extends Registration Requirements for Investment Companies and Broker Dealers to ICO/Crypto Firms

Fund managers take note – after over a year of warning, this month the SEC announced a pair of settlement orders with respect to registration requirements for a fund and broker dealer operating in the crypto and digital assets space. It was the agency’s first ever enforcement actions applying the investment company and broker-dealer registration provisions of the securities laws to businesses involved in digital securities. As we’ve written on Blockchain and the Law blog, we expect to see the SEC continue to expand its oversight of digital assets as securities.

In In the Matter of Crypto Asset Management, a crypto-focused hedge fund manager, Crypto Asset Management LP (“CAM”), held out its fund as the “first regulated crypto asset fund in the United States.” Per the settlement order, CAM’s statements were incorrect because neither CAM nor the fund were registered with the SEC. Finding that the fund invested more than 40% of its assets in securities (i.e., certain crypto/digital assets), the SEC concluded that it was an “investment company” and thus subject to the Investment Company Act. Because the fund was not registered as an investment company and did not qualify for any of the Investment Company Act’s statutory exemptions or exclusions, the SEC charged CAM with causing violations of the registration provisions of the Investment Company Act. Furthermore, the SEC alleged that CAM made negligent misrepresentations in violation of the Securities Act and the Advisers Act by stating that it was “regulated.” CAM and its principal agreed to make rescission offerings to all its affected investors in addition to paying a penalty.

In In the Matter of TokenLot, LLC, the SEC alleged that a self-described “ICO Superstore” operated as an unregistered broker-dealer by offering customers the ability to buy, sell and trade digital assets connected with ICOs. Finding that digital assets issued and traded by TokenLot were securities, the SEC charged TokenLot and its owners with violating broker-dealer registration requirements under the Exchange Act and also alleged that they engaged in unregistered offers and sales of securities in violation of Section 5 of the Securities Act. Per the SEC’s order, TokenLot’s principals agreed to destroy TokenLot’s remaining inventory of digital assets with the help of a qualified third party, in addition to paying disgorgement and penalties. The SEC also imposed industry bars against the principals, with the right to reapply after three years.

TokenLot and CAM are the SEC’s first ever enforcement actions expanding these provisions of the securities laws to digital assets and cryptocurrencies, following the SEC’s issuance of the DAO Report on July 25, 2017, its request to lawyers to knock it off with the unregistered coin offerings, and various other enforcement proceedings over the past year. This pair of orders signals that the SEC believes any grace period with respect to securities law compliance in connection with digital assets is over.

© 2019 Proskauer Rose LLP.

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About this Author

Joshua Newville, Proskauer Rose, regulatory enforcement attorney, industry compliance legal counsel, securities exchange commission lawyer
Partner

Joshua M. Newville is a partner in the Litigation Department in New York. His practice focuses on commercial litigation and regulatory investigations. Mr. Newville advises companies and individuals in securities litigation and compliance matters. He also focuses on internal investigations and enforcement matters. Prior to joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset...

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Samuel Waldon, Proskauer Law Firm, Washington DC, Corporate Law and Litigation Attorney
Partner

Sam Waldon is a partner in the Litigation Department and a member of the Securities Litigation, White Collar Defense & Investigations and Asset Management Litigation Groups.

Sam’s practice focuses on securities litigation, enforcement and regulatory matters. He represents corporations and financial institutions, and their officers, directors and employees, in investigations, exams, internal investigations and litigation. Sam has in-depth experience in a broad range of Securities and Exchange Commission (SEC) enforcement matters, including financial disclosure, accounting, investment adviser, asset management, private equity, broker dealer, FCPA, cyber-related misconduct, insider trading and market abuse.

Before joining Proskauer, Sam served as Assistant Chief Counsel in the SEC’s Division of Enforcement for eight years. In that role, Sam helped develop and implement many of the Division’s policies and procedures, and advised the Division’s senior leadership, investigative staff and trial unit attorneys on a wide range of legal and policy issues. He regularly provided guidance on the terms of negotiated settlements and charging decisions in litigated matters. Sam also worked closely with staff in other Divisions and Offices throughout the SEC on enforcement related issues, including playing a key role in the drafting of the rules establishing the SEC’s whistleblower program.

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Robert Plaze, Investment Manager Attorney, Regulatory and Compliance
Partner

Robert E. Plaze is a partner and a member of the Investment Management team. He advises investment advisers and investment companies on an array of matters, with a particular focus on regulatory and compliance matters arising under the federal securities laws.

Bob previously served as Deputy Director of the Division of Investment Management of the U.S. Securities and Exchange Commission. During his nearly 30 years of service with the Commission, he was responsible for policy development and management of many of the key regulatory initiatives during that period affecting investment...

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Lucy Wolf, Proskauer Law Firm, Boston, Litigation Attorney
Associate

Lucy Wolf is an associate in the Litigation Department and a member of the Private Funds Group.

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