The US top regulator has stepped in to penalize yet another “initial coin offering” (ICO) after its operators failed to register their tokens as a security. California-based founders of crypto firm Dropil, Jeremy McAlpine, Zachary Matar, and Patrick O’Hara, are said to have raised close to $2 million following an ICO that began in March 2018.
The ICO in question was promoting an automated crypto trading scheme and management system called ‘Dropil DEX,’ provided by a startup called Dropil. Dropil is an Ethereum-based cryptocurrency trading platform that includes a suite of market analysis tools.
Dropil allegedly claimed that funds raised from the token sale are pooled into an autonomous system that basically has 3 overarching risk strategy pools. Each pool was made up of many bots trading and varying strategies with smart logic across a number of exchanges and currencies.
There was a minimum of $50 required to start using Dex, which allowed its operators to collect $1.9 million from 2,500 investors. The profit cycle was set to 15 days and gains were distributed as additional DROP tokens every two weeks. If an investor wants to withdraw his profits, he will have to respect that cycle and wait for it to finish.
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But instead of using investor money to trade with Dex, “Dropil allegedly diverted the funds raised to other projects and to the founders’ personal digital asset and bank accounts,” the SEC said.
Regulatory status of cryptos remains murky
The complaint further alleges that Dropil misrepresented its results, success rate and volumes, giving the false appearance that Dex was operational and profitable.
The SEC claims that the offering ran afoul of securities laws because the vehicle being offered could be considered securities, and thus the principles should have registered with the SEC as broker-dealers.
The regulatory status of cryptocurrency offerings generally, remains somewhat murky. However, the SEC warned that securities law might apply to some virtual tokens depending on their specific characteristics. In those cases, securities registration, disclosure, and other requirements apply.
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.