The US Securities and Exchange Commission (SEC) has published a report describing the actions taken against fraudulent financial ventures and ICOs for 2018’s fiscal year. The report also provides an insight into the ICO-related fraud that has happened over the last couple of months.
The organization’s Cyber Unit led the misconduct actions against ICOs and other crypto ventures. “We believe our approach to enforcement in this space has been thoughtful and consistent. Importantly, it has provided a template for authorities in other countries, where fraud and misconduct targeting U.S. investors often have been based,” the SEC stated in the report.
The document deems ICOs as “high-risk investments,” since many of them “lack viable products or established track records.” It also revealed that many are unable to protect digital assets from hackers or contain shady business models. Some operate under the guise of raising business capital and are completely fraudulent.
Since the Cyber Unit’s formation, which became fully operational this year, the SEC’s actions against cyber misconduct has increased significantly. It brought forth 20 standalone financial fraud-related cases in 2018, 12 of which had to do with digital assets and ICOs. The SEC revealed that at the end of the fiscal year, it had approximately 225 cyber-related investigations.
Among the major cases against an ICO involved two individuals who opened the so-called “ICO superstore” TokenLot LLC. The SEC filed charges against both figures for participating in unregistered offerings and for operating as an unregistered broker-dealer. In mid-September, however, the charges have been settled.
The commission obtained an emergency order halting an ICO headed by self-proclaimed “blockchain evangelist” Michael Alan Stollery and Titanium Blockchain Infrastructure Services, Inc. The ICO generated about $21 million from multiple investors, both in the US and abroad. The SEC became involved upon receiving complaints that Stollery had lied about the business relationships of Titanium with the Federal Reserve and other companies such as the Walt Disney Company, PayPal, and Verizon. Other complaints also stated that Titanium’s website contained false corporate client testimonials.
Other cases included the cyber intrusion of an Iowa investment advisor and broker-dealer. The personal information of thousands of customers has been compromised by the intrusion. The SEC charged the company with violating the Regulation S-ID or Identity Theft Red Flags Rule, which works to help safeguard investors from identity theft. It also charged another defendant who had allegedly been manipulating Fitbit securities prices through incorrect regulatory filings.
The regulator acknowledges that ICOs have become a common way of generating capital for new businesses and startups. Although representatives do not intend to stifle the innovation within the financial space, they have worked hard to educate investors about which fundraising efforts may or may not be legitimate. They inform investors by enforcing trading suspensions and releasing public statements. Moreover, the SEC has recommended enforcement actions against firms looking to engage in an unlicensed broker-dealer activity or violate registration protocols.
The SEC has also implemented harder ways to combat fraud like the Share Class Selection Disclosure (SCSD) Initiative, which is aimed at identifying and resolving widespread financial violations. The commission is planning to enforce SCSD standards to guarantee the reimbursement of retail investors who have been cheated by fraudulent ICOs.