For the first time, the Financial Industry Regulatory Authority (FINRA) has issued fraud charges in connection with an initial coin offering, or ICO. The Wall Street-funded watchdog has accused Timothy Tilton Ayre, a Massachusetts resident, of defrauding investors through selling a cryptocurrency called ‘HempCoin’, which he misrepresented as being backed by investments in a public company.
FINRA’s statement describes how Ayre sold the digital tokens as part of a purported plan to lure victims to invest in his “worthless” company, Rocky Mountain Ayre, Inc. (RMTN), which was trading over the counter on the Pink Market of OTC Markets Group.
According to the complaint, Ayre repackaged HempCoin tokens and promoted it as “a security backed by RMTN common stock.” He also advertised the cryptocurrency, which was listed for trading on two exchanges, as the world’s first cryptocurrency to represent equity ownership in a publicly traded company.
The regulator further alleges that Ayre promised investors that each coin was equivalent to 0.10 shares of RMTN common stock.
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The agency did not provide any details about whether Ayre is in custody or if he is also facing charges from regulators, or if it plans to return some of the proceeds of the scam by seizing accounts.
FINRA responds to growing threat of ICOs
The news of the scam underscores how crypto crowdsales can be exploited by fraudsters flogging get-rich quick schemes.
While many ICOs claim that they are simply selling tokens as a means to access new digital platforms, FINRA issued a warning last year stating that many such tokens are in fact ‘pump and dump’ scams.
In concluding the filing, FINRA said that the complaint represents the initiation of a formal proceeding rather than a decision regarding the allegations. Under current rules, FINRA can initiate temporary cease-and-desist orders to alleged manipulators but they only remain in effect until the underlying disciplinary proceedings have concluded.