Cryptocurrencies and ICOs: Key Market, Legal, and Regulatory Developments

by Kilpatrick Townsend & Stockton LLP

Texas Judge Issues Preliminary Injunction Against Dubai-Based Officer of Allegedly Fraudulent Cryptocurrency Offering

Earlier this year, the United States District Court for the Northern District of Texas entered an ex parte temporary restraining order (TRO) against AriseBank and its top executives – Jared Rice Sr., the bank’s CEO, and Stanley Ford, the bank’s chief operating officer.  The TRO was based on the U.S. Security and Exchange Commission’s (SEC) January 2018 complaint against the trio for their allegedly fraudulent initial coin offering (ICO) of AriseBank’s blockchain-based cryptocurrency, AriseCoin.

On March 9, 2018, AriseBank and Rice agreed to entry of a preliminary injunction that included many provisions of the TRO, including the freezing of their assets.  Ford, however, who resides in Dubai, had not responded to emails from the SEC’s attorneys and had not made an appearance in the case.  Arguing that Ford is a flight risk and armed with additional evidence of Ford’s participation in the alleged fraud, the SEC moved the Court to extend the TRO as to Ford and reset his preliminary injunction hearing so that the Court-appointed receiver for AriseBank could testify as to the new evidence concerning Ford’s involvement.  The Court granted the motion, setting Ford’s preliminary injunction hearing for March 19, 2018 and extending the TRO against Ford through the hearing date.

Yesterday, the Court entered a preliminary injunction against Ford, who still has not made an appearance in the case.  Among other things, the injunction freeze’s Ford’s assets and requires him to surrender his passport and not travel outside the United States until further court order.  The Court also granted the SEC’s motion to effect service of the summons and complaint on Ford via email to Ford’s personal Gmail address and by mail to a Dubai P.O. Box associated with Ford and AriseBank.

The SEC’s Complaint Regarding the AriseCoin ICO 

The SEC alleges several problems with the AriseCoin ICO.  First, it claims AriseBank, Rice and Ford violated securities laws because the ICO is an unregistered securities offering and AriseBank had filed no Form D claiming an exemption from registration.  The SEC argues the AriseCoin ICO is a securities offering because it meets the Supreme Court’s Howey test for an “investment contract.”  Specifically, the SEC alleges: (1) the ICO requires investors to pay money to purchase AriseCoins; (2) the investment is in a “common enterprise” because the investors’ return is dependent on the efforts of AriseBank, Rice and Ford to grow the value of AriseCoins; and (3) the investors’ role in the investment program is entirely passive and their expectation of profit is based solely on AriseBank’s, Rice’s and Ford’s “entrepreneurial or managerial” efforts.  See SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946).  In other words, the SEC alleges that the $600 million AriseBank claims to have raised for AriseCoin – and the $1 billion it intends to raise – are being obtained illegally.

And according to the SEC, the problems do not stop there.  The agency alleges the AriseCoin ICO’s white paper as well as AriseBank’s press releases and other public statements made in connection with the offering contained “false and misleading statements and omissions.”  As examples, the SEC’s complaint cites:

  • AriseBank’s allegedly false announcement on January 18 that it had purchased an FDIC-insured bank and therefore could “offer its customers FDIC-insured accounts and transactions.”  According to the SEC, the FDIC has no record of AriseBank or that the bank it acquired is, in fact, federally insured.
  • AriseBank’s claimed partnerships with a major credit card company and with payment processing platform Marqeta Inc., which the bank’s white paper allegedly claimed will permit it to create a branded card that would make “crypto in your Arise account … instantly available on your AriseCard.”  The SEC claims these statements were false. According to the lawsuit, Marqeta itself sent AriseBank a cease-and-desist letter and posted on Twitter that the claimed partnership never existed.
  • AriseBank’s failure to disclose the alleged criminal histories of Rice and AriseBank President Kelvin Spencer in the executive biographies provided on AriseBank’s website and in its white papers.  The SEC alleges “[t]his information – which bears directly on the honesty and professional competence of AriseBank’s principals – would have been highly material to investors.”

Based on these allegations, the SEC’s complaint alleges several violations of securities laws and seeks permanent injunctions against AriseBank, Rice and Ford prohibiting them from further violations, and further prohibiting Rice and Ford from offering digital securities.  The complaint also seeks an order disgorging any ill-gotten gains the defendants obtained as a result of the alleged securities violations, and requiring each Defendant to pay a civil penalty.

The case is Securities and Exchange Commission v. AriseBank et al., No. 3:18-cv-00186, in the U.S. District Court for the Northern District of Texas.

Recent SEC Enforcement Action – Is This A Security?

The suit against AriseBank is one of a recent flurry of cryptocurrency-related enforcement actions, coinciding with increased warnings from federal regulators about fraud and other risks associated with cryptocurrency investments and ICOs.  These actions continue to center on the underlying question or whether a particular ICO is a security offering that must be registered with the SEC.  Adding to the lack of clarity are the many different flavors of ICOs and coins – or “tokens” – that they offer.

Certain coins serve simply as stores of value (think: Bitcoin) and function as independent monetary bases.  As SEC Chairman Jay Clayton noted at a February 6, 2018 Senate Banking Committee hearing on virtual currencies, neither the SEC nor the Commodity Futures Trading Commission (CFTC) “have direct jurisdiction over the popular markets that trade true cryptocurrencies.”  Other coins, known as “securities tokens,” entitle the holder to ownership rights in external, tradable assets such as precious metals or real estate.  A subset of securities tokens are “equity tokens,” which entitle the owner to stock in a company.  As their name implies, securities tokens likely will always be viewed as subject to federal securities registration requirements.

On the other hand, “utility tokens” provide a utility function to their holders, such as access to a product or service, and often serve as the exclusive currency for consummating transactions within the issuer’s service network.  For example, access to and payment for online cloud storage might be accomplished solely through tokens issued by the cloud storage provider.  While the value of utility tokens can fluctuate based on supply and demand, they serve more as a coupon for admission rather than ownership in a security, which may put them outside the SEC’s jurisdiction.  In his December 2017 Statement on Cryptocurrencies and ICOs, SEC Chairman Clayton acknowledged that certain utility tokens “may not implicate our securities laws,” and gave as an example a hypothetical token used to bootstrap a book-of-the-month club.  However, Chairman Clayton was quick to caution that:

Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.  Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law.

Given Chairman Clayton’s conclusion that “[b]y and large, the structures of [ICOs] that I have seen promoted involve the offer and sale of securities,” investors and coin issuers should be on the lookout for additional guidance on the features of ICOs and tokens that the SEC will view as implicating federal registration requirements.

Be sure to check back in with the Kilpatrick Townsend Fintech blog for key market, legal, and regulatory updates on cryptocurrencies and ICOs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Kilpatrick Townsend & Stockton LLP | Attorney Advertising

Written by:

Kilpatrick Townsend & Stockton LLP

Kilpatrick Townsend & Stockton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.