SEC’s Cyber Unit Files Its First-Ever Charges To Halt Alleged Initial Coin Offering Scam

by Fox Rothschild LLP
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The Securities and Exchange Commission announced yesterday that its new Cyber Unit obtained an emergency asset freeze to halt a “fast-moving” Initial Coin Offering (ICO) fraud that raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month.

The SEC filed charges against what it calls a “recidivist Quebec securities law violator” named Dominic Lacroix, and his company, PlexCorps. The complaint, filed in federal court in Brooklyn, alleges that Lacroix and PlexCorps marketed and sold securities called PlexCoin on the internet to investors in the U.S. and elsewhere, claiming that investments in PlexCoin would yield a 1,354 percent profit in less than 29 days. The SEC also charged Lacroix’s partner, Sabrina Paradis-Royer, in connection with the scheme. Based on its filing, the SEC obtained an emergency court order to freeze the assets of PlexCorps, Lacroix, and Paradis-Royer.

The charges are the first filed by the SEC’s new Cyber Unit, which was created in September 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.

“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,” said Robert Cohen, Chief of the Cyber Unit. “We acted quickly to protect retail investors from this initial coin offering’s false promises.”

The SEC’s complaint charges Lacroix, Paradis-Royer and PlexCorps with violating the anti-fraud provisions, and Lacroix and PlexCorps with violating the registration provision, of the U.S. federal securities laws. The complaint seeks permanent injunctions and disgorgement plus interest and penalties. For Lacroix, the SEC also seeks an officer-and-director bar and a bar from offering digital securities against Lacroix and Paradis-Royer.

The SEC’s Office of Investor Education and Advocacy has issued several warnings to investors about scams of companies claiming to be engaging in initial coin offerings. In an Investor Bulletin published in July 2017, the SEC announced that in the context of ICOs, virtual coins or tokens that are offered or sold may be securities, and if they are securities, the offer and sale of these virtual coins or tokens in an ICO is subject to the federal securities laws:

Virtual coins or tokens are created and disseminated using distributed ledger or blockchain technology. Recently promoters have been selling virtual coins or tokens in ICOs. Purchasers may use fiat currency (e.g., U.S. dollars) or virtual currencies to buy these virtual coins or tokens. Promoters may tell purchasers that the capital raised from the sales will be used to fund development of a digital platform, software, or other projects and that the virtual tokens or coins may be used to access the platform, use the software, or otherwise participate in the project. Some promoters and initial sellers may lead buyers of the virtual coins or tokens to expect a return on their investment or to participate in a share of the returns provided by the project. After they are issued, the virtual coins or tokens may be resold to others in a secondary market on virtual currency exchanges or other platforms.

In an Investor Alert from August 2017, the SEC specifically warned that “[f]raudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams. These frauds include ‘pump-and-dump’ and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies.”

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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.

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