July brought us some interesting news about the Government enforcement actions and the securities class action lawsuits filed on behalf of the investors, which we will be seeing more in the near future.
Blotics Ltd., a UK-based company, which owns coinschedule.com, a once-popular website for the upcoming ICOs has been charged by the SEC with violation of the U.S. securities law. During 2016-2019, the website presented a large number of token offerings, which coinschedule.com claimed to be credible and safe for investment based on the “trust score” developed by coinschedule.com. At least some of the advertised tokens were found to be securities.
What was also discovered by the SEC is that coinschedule.com had been accepting payments from the companies for the promotion of their ICOs on the website. The U.S. securities law requires those who promote a virtual token or coin that is a security to disclose the nature, scope, and amount of compensation received in exchange for the promotion, which coinschedule.com failed to do.
As a result, the company settled with the SEC and agreed to cease and desist from committing or causing any future violations of the anti-touting provisions of the U.S. securities laws, and to pay $43,000 in disgorgement, plus prejudgment interest, and a penalty of $154,434.
New Jersey’s Acting Attorney General obtained a Summary Cease-and-Desist court order against BlockFi, a crypto lending platform, to halt its Interest Account operations in the U.S. for violation of the securities law of New Jersey.
As alleged by the NJ Acting Attorney General, BlockFi, Inc. through its affiliate BlockFi Lending, LLC has been funding its lending operations at least in part through the sale of unregistered securities to the public. BlockFi offered investors an opportunity to deposit certain eligible cryptocurrencies into their Interest Accounts at BlockFi. The deposited funds were then used by BlockFi for lending and proprietary trading. In exchange, investors were promised a monthly interest.
The Interest Accounts offered by BlockFi constitute securities under the NJ securities law. However, BlockFi failed to register it with the NJ Bureau of Securities or any other securities regulator.
The main challenge for the DeFi projects is the same as for the companies that are selling tokens. Although, there may be no specific or explicit reference to the crypto- and decentralized finance products in the regulations yet, the existing law applies, nonetheless. Especially, when it comes to securities law.
In July, a securities class action lawsuit was filed against Coinbase Global Inc. alleging violation of the U.S. securities law, including allegations of false misrepresentation to investors before the company went public and in connection with its IPO. The complaint states that Coinbase failed to disclose that it needed a sizable cash injection and its platform was vulnerable to interruptions of service. Due to these facts, the positive declarations about the company’s business were misleading and lacked a reasonable basis.
The IPO took place on April 14, 2021. However, in May 2021 the company announced its plans to raise about $1.25 billion via a convertible bond sale signaling the market about the company’s cash shortage. Subsequently, Coinbase admitted to technical problems “due to network congestion.” Indeed, many Coinbase users experienced a number of issues with their accounts, including the inability to trade and withdraw funds when BTC and other cryptocurrencies were rallying. However, all of that was happening before the company’s IPO and was not disclosed to investors.
The announcements made by Coinbase in May 2021 led to a sharp decline in the stock price. The securities class action lawsuit seeks to recover damages on behalf of all Coinbase Global, Inc. investors who purchased common stock between April 14, 2021, and May 19, 2021.
Another securities class action lawsuit was filed by the private investors against Dfinity group of entities as well as Polychain Capital and Andreessen Horowitz in connection with the sale of Internet Computer Project tokens (“ICP”). The ICP is a native cryptocurrency of the Dfinity Internet Computer Project, which “purports to be a decentralized version of the internet itself. In essence, it is a smart contract platform designed to power blockchain versions of the internet’s most popular applications – decentralized alternatives to WhatsApp, LinkedIn, eBay, TikTok, etc. – which would displace the need to use centralized, gatekeeping hosting services like Amazon Web Services,” according to the complaint.
The complaint also alleges that 469,213,719 ICP “were created out of thin air by Dfinity.” The sale proceeds were used to fund the company’s operations. And at least 25% of all ICP were given to Polychain Capital and Andreessen Horowitz, which made them “significant stakeholders of ICP.”
The complaint describes in great detail the efforts made by the entities to promote ICP and further alleges that the ICP tokens qualify as securities under the U.S. securities law. However, the sale of ICP was not registered with the securities regulator in violation of the U.S. securities law. The complaint seeks rescission of the ICP purchases, compensatory damages, interests, and other relief.
This summary is provided by international attorney Katrina Arden. Attorney Katrina Arden spoke at the leading tech conferences, authored legal articles and participated in discussions with multiple countries’ regulators on the development and implementation of the blockchain and cryptocurrency law.