The principles of a Michigan-based startup selling digital tokens to investors to raise capital for its self-described “ICO Superstore” have agreed to settle charges brought by the US Securities and Exchange Commission (SEC), which found that their conduct was that of unregistered broker-dealers.
A communiqué on the matter issued by the commission said that TokenLot LLC and its owners, Lenny Kugel and Eli L. Lewitt, agreed to pay more than $550,000 to settle charges, without admitting or denying the allegations. They also received a lifetime officer-director bar, lifetime penny stock bar and an injunction prohibiting them from violating federal securities laws.
The company raised an undisclosed amount of funds from more than 6,100 retail investors to finance the development of its blockchain-based platform, that was meant to facilitate purchases of ICO tokens. TokenLot claims that it enables users to do all of their ICO due diligence and purchasing through one consolidated service.
The SEC claims that the offering ran afoul of securities laws because the tokens being offered could be considered securities, and thus the principles should have registered with the SEC as broker-dealers.
The regulatory status of ICOs, and cryptocurrency offerings generally, remains somewhat murky. However, the SEC warned that securities law may apply to some virtual tokens depending on their specific characteristics. In those cases, securities registration, disclosure and other requirements apply.
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According to Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, the regulator encourages “those developing digital asset trading businesses to contact the SEC staff at FinTech@sec.gov for assistance in analyzing registration and other securities law requirements.”
Actions to rein in the red-hot sector
The SEC has repeatedly warned investors against throwing money into the crowdsale because the company intended to launch a cryptocurrency-based investment scheme without even attempting to follow US securities laws. The watchdog is worried that in many cases, retail investors aren’t adequately told about the risks involved in cryptocurrency investment.
The SEC has taken enforcement actions against a dozen companies, putting their offerings on hold after issuing warnings. Further, it has frozen the assets of several cryptocurrency firms, halted ICOs and suspended trading.
Most recently, the SEC rejected another attempt by Cameron and Tyler Winklevoss, founders of the Gemini cryptocurrency exchange, to list shares of what would have been the world’s first Bitcoin exchange-traded fund (ETF).
In May, the SEC’s Office of Investor Education and Advocacy (OIEA) created a bogus ICO website that shows how an investment opportunity that was too good to be true would look.
Putting cryptocurrency companies and their advisers on notice, however, failed to chill the booming market. The recent clampdown comes just as major US cryptocurrency operators are racing to build the nation’s first regulated venues for tokens deemed to be securities.