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Companies, lawyers probed for selling cryptocurrency initial coin offerings

Kevin Parrish
Ponzi schemes are alive and well, and now they've made their way to to the digital realm in the form of cryptocurrency. The FTC has filed a complaint in court against one such scheme called the Bitcoin Funding Team.

The Securities and Exchange Commission (SEC) is now investigating companies and individuals for possibly violating securities laws through initial coin offerings (ICO), or token sales, of cryptocurrency. The SEC reportedly issued “dozens” of subpoenas and information requests to determine how sales and pre-sales of ICOs work given they don’t follow the same rules that regulate initial public offerings (IPOs) to protect investors. 

An IPO, or Initial Public Offering, is when a privately held company goes public with its stock. Companies take this route to become publicly traded on the stock market, or to generate funds to expand their footprint. Meanwhile, companies use an ICO to raise funds for a new cryptocurrency business or platform. Investors use legal tender or digital coins to purchase a percentage of the new cryptocurrency in return for digital tokens, financially fueling the platform. 

Yet it’s the procedure ICOs use that may be generating government involvement. It’s similar to how developers raise money to create games by selling an “early access” token on digital platforms, like Steam, to fund the project. ICOs are listed as “software presale tokens,” and use descriptors such as “crowdsale” or “donation” instead of the ICO term to escape federal regulation. 

But the SEC is catching on, and is now grilling companies that sold digital coins to raise funds, and the lawyers and advisory firms that help with sales. The SEC began demanding information last year, and then rolled out around 80 subpoenas over the last three months to companies and what the SEC calls gatekeepers: individuals who help the sale of ICOs. 

According to the SEC, virtual currencies should be listed as securities and registered with regulators. Jay Clayton, chairman of the SEC, believes many “promoters” of ICOs and cryptocurrencies simply aren’t complying with securities laws. He asked the agency in January to change that. 

“Market professionals, especially gatekeepers, need to act responsibly and hold themselves to high standards,” Clayton said. “To be blunt, from what I have seen recently, particularly in the initial coin offering space, they can do better.” 

The subpoenas request information about sold cryptocurrencies, how companies market token sales, and the identities of individuals who purchased those tokens. The subpoenas were distributed across multiple cities including Boston, New York, and San Francisco. Unnamed sources who viewed the subpoenas didn’t indicate if an additional wave of subpoenas is on the way to digital coin investors. 

“Generally, subpoenas are the guided missiles of SEC enforcement actions,” says Aaron Kaplan, a securities attorney and co-founder of Prometheum. “There’s going to be a big reckoning for those who have operated outside the federal securities laws, with more SEC enforcement actions and criminal prosecutions in the near future.” 

Online retailer Overstock took a nosedive on the stock market Thursday after disclosing in a regulatory filing that it’s currently under investigation by the SEC over its cryptocurrency exchange subsidiary tZero. The company raised $100 million from its ICO alone, and another $150 million to expand its blockchain-based trading system. Overstock must now provide documents related to the ICO and its tokens.