The Securities and Exchange Commission (SEC) has charged a businessman and two companies with defrauding investors in a pair of so-called initial coin offerings (ICOs) which claimed to be backed by investments in real estate and diamonds.
The SEC alleges that Maksim Zaslavskiy and his companies have been selling unregistered securities and that the digital tokens or coins being peddled don't really exist. Zaslavskiy and REcoin allegedly misrepresented the fact that they had raised between $2 million and $4 million from investors when the actual amount was approximately $300,000.
The securities regulator is warning investors about the risks of the cryptocurrency-inspired method of raising capital. "Investors should be wary of companies touting ICOs as a way to generate outsized returns," said Andrew Calamari, the director of the SEC's New York regional office. "As alleged in our complaint, Zaslavskiy lured investors with false promises of sizable returns from novel technology."
Zaslavskiy carried his scheme over to Diamond Reserve Club, which purportedly invests in diamonds and obtains discounts with product retailers for individuals who purchase "memberships" in the company. The SEC has obtained an emergency court order to freeze the assets of Zaslavskiy and his companies.
Earlier this year, the SEC moved in on the "Wild West" world of ICOs, which has sent the blockchain world reeling.
ICOs have been attracting plenty of attention this year. Recently Paris Hilton has backed project called Lydian, which she hyped in a tweet that has since been deleted.
There are a number of ICO critics who are voicing concerns.
"My biggest concern now is the rapid rise in capital inflows into the crazy concept called ICOs," said Per Wimmer, the founder of Wimmer Financial, a London-based corporate-advisory firm. "That's a big bubble - much more concerning than cryptocurrencies, per se."
Recently South Korea has followed the example of China and also banned ICOs. Switzerland's financial watchdog Swiss Financial Market Supervisory Authority FINMA has shared concerns that some ICOs are violating the country's laws against "terrorist financing."
"Switzerland and Korea have a decidedly different take on what to do about ICOs," said Perry Woodin, CEO of Node 40. "Where Korea has followed China's lead by imposing an outright ban on ICOs, Switzerland is taking a more moderate approach. The Swiss FINMA Announcement mirrors the SECs bulletin where ICOs will be covered by existing securities regulations. ICOs seem to have a great deal of potential. As regulatory guidance becomes more clear, we should see the entire ICO market mature into a useful vehicle for raising capital."
"Because the digital token market is so new, I believe that many investors lack the necessary sophistication to assess or appreciate the viability, sustainability and governance of projects that are raising hundreds of millions of dollars in capital," said Ryan Taylor, CEO of Dash. "Such an environment is ripe for abuse, fraud, and waste. Just because the technology is new, bad actors may assume they could abuse investors, so it is reassuring that the FINMA stands ready to investigate abuse and regulation breaches that have harmed investors. Guidance from FINMA will also serve to prevent well-intentioned projects from unintended violations."
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