Securities Litigation Blog | Burr & Forman LLP

SEC Charges Hip-Hop Artist and Boxer for Unlawfully Promoting ICOs

Fri, 30 Nov 2018 09:00:01 -0500

On November 29, the Securities and Exchange Commission (SEC) announced in a press release that it has settled charges against two celebrities for promoting investments in ICOs without disclosing payments received for the promotion. The SEC has previously indicated in a November 2017 statement to the public that investors should be wary of celebrity-backed ICOs, but these are the SEC's first cases against celebrities for promoting ICOs for compensation without appropriate disclosures.

Music producer Khaled Khaled (known as DJ Khaled) and professional boxer Floyd Mayweather ...

SEC Loses Injunction Bid on Crypto ICO

Thomas K. Potter, III — Fri, 30 Nov 2018 09:00:02 -0500

Earlier this week, SEC Enforcement staff lost a bid for a preliminary injunction against a prospective ICO in its pre-offering testing phase.

Blockvest was preparing for an ICO of "BLV" tokens. Its website touted the endeavor as the "first licensed and regulated tokenized cryptocurrency exchange and index fund based in the United States," and showed pictures of the seals of the SEC, CFTC, NFA and others. It also claimed to be regulated by the fictitious "BEC" (Blockchain Exchange Commission), which not coincidentally appeared to share the same Washington address as the SEC.

So how ...

SEC on ICOs: Repentance, Registration and Rescission

Thomas K. Potter, III — Tue, 20 Nov 2018 09:00:03 -0500

Last Friday, November 16, the SEC issued a pair of settled actions setting a de facto standard of compliance for unregistered ICOs wanting to "come in from the cold." In each of them, the ICO offeror paid a $250,000 monetary penalty, registered its ICO as a security, and entered a rescission undertaking respecting all tokens issued to date.

The first was a settled action by Paragon Coin - a digital token ("PRG") unregistered offeror in the cannabis industry. Paragon agreed to cease and desist, file a registration statement, and publicly offer rescission of the ICO. The Commission cited ...

SEC's First Action Against Unregistered Crypto "Exchange"

Thomas K. Potter, III — Mon, 19 Nov 2018 09:00:04 -0500

On November 8, the SEC filed its first settled enforcement action against cryptocurrency trading platform for operating as an unregistered exchange trading securities, in violation of the Securities Exchange Act of 1934.

"EtherDelta" was a platform offering matched-book secondary market trading of ERC-20 tokens, many of which had issued in unregistered initial-coin-offerings ("ICOs") having attributes of "securities" under the Howey investment-contract analysis. The Howey test was applied by the SEC in its July 2017 Section 21A Report, The DAO, to conclude that digital ...

Tennessee Securities Regulator is President-Elect of NASAA

Thomas K. Potter, III — Mon, 01 Oct 2018 09:00:05 -0400

Frank Borger-Gilligan, Tennessee's chief securities regulator, last week was selected as President-Elect of the North American Securities Administrators Association ("NASAA") at the annual meeting in Anchorage, Alaska. Borger-Gilligan will serve as NASAA's president for the 2019-2020 term.

NASAA is the nation's oldest investor protection agency. The North American Securities Administrators Association (NASAA) was organized in 1919, making it the oldest international investor protection agency. NASAA's 67 members are state, provincial, and territorial securities ...

Tweet Suit

Thomas K. Potter, III — Fri, 28 Sep 2018 09:00:06 -0400

So maybe it's not such a good idea for a volatile, impulsive chief executive to use his personal Twitter account to announce major policy shifts. No, no - not that one.

Everyone thought it would happen tout de suite, but the SEC finally filed its Tweet suit this week over Elon Musk's August 7 Tweet (to over 22 million followers): "Am considering taking Tesla private at $420. Funding secured."

Everyone cringed immediately about those last two words - a representation of fact. Especially because $420 a share was a substantial, if cannabis-tinged and arbitrary, premium. And because Tesla ...

FINRA's First Crypto Enforcement Action

Thomas K. Potter, III — Thu, 13 Sep 2018 09:00:07 -0400

On September 11, FINRA announced its filing of an enforcement action accusing a Massachusetts broker of fraud and registration violations arising from his sale of an unregistered cryptocurrency, "HempCoin." It is FINRA's first cryptocurrency enforcement action.

FINRA alleges Timothy Ayre of fraudulently attempting to bolster his worthless public shell company, Rocky Mountain Ayre, Inc. (RMTN in the OTC pink sheets). Ayre alleged repackaged HempCoin as a security backed by RMTN common stock, marketing it as "the world's first currency to represent equity ownership" in a ...

The SEC's Pair of Settled Cryptocurrency Enforcement Actions

Thomas K. Potter, III — Tue, 11 Sep 2018 09:00:08 -0400

On September 11, the SEC announced a pair of settled cryptocurrency enforcement actions. The first was against an unregistered digital-asset hedge fund. The second shut down an "ICO Superstore" as an unregistered broker-dealer.

Crypto Asset Management LP ("CAM") ran an unregistered investment company while falsely marketing it as the "first regulated crypto asset fund in the United States." The unregistered offering raised $3.6 million over four months in late 2017, violating the '33 Act. Because the offering proceeds were used to buy digital assets that constituted over 40% of ...

Is There Anything Left of the Fiduciary Rule?

Mon, 25 Jun 2018 09:00:09 -0400

The issue over the Fiduciary Rule, and whether it will be implemented, revised, vacated, forgotten, etc. has been ongoing. In March 2018, the Fifth Circuit Court of Appeals ruled in favor of several business groups who challenged the Fiduciary Rule. See (https://www.ca5.uscourts.gov/opinions/pub/17/17-10238-CV0.pdf).

Specifically, the business groups challenged the Rule on multiple grounds, including:

(a) the Rule's inconsistency with the governing statutes,

(b) DOL's overreaching to regulate services and providers beyond its authority,

FINRA Proposes to Remove "Control" as Quantitative Suitability Requirement

Thomas K. Potter, III — Tue, 05 Jun 2018 09:00:10 -0400

FINRA recently proposed to remove the broker's "control" of a securities account as a required element of a "quantitative suitability" violation under Rule 2111.

For many decades, case law on broker-dealer fraudulent practices under Rule 10b-5 and others recognized a cause of action for "churning:" Knowingly recommending an unsuitable volume or frequency of trading in an account, by a broker exercising actual or constructive control over that account, as a form of self-dealing to generate commission revenue at the customer's expense.

When FINRA revised its "suitability" rule ...