ICO’s Defrauding Investors - SEC

9 October, 2017 | By Ruchika Sharma

The SEC or Securities Exchange Commission of the United States of America has very recently charged two ICOs (initial coin offering) with knowingly defrauding it's Investors. The ICOs in question here are a certain diamond backed ICO and a real estate backed ICO.

Businessman Maksim Zaslavskiy promoted his ventures REcoin and DRC World as the first real estate and diamond backed crypto currency firm. In the charge order filed by the SEC, it accuses Mr. Zaslavskiy of indulging in the sale of unregistered securities and coins, whose existence is unknown to customers who were completely unaware about the underlying scheme of these businesses.

The investors were each promised a sizeable return from both of Mr. Zaslavskiy's businesses while never making it absolutely clear as to how and where their money would be invested. 

Mr Zaslavskiy's businesses also incorrectly represented the portion of funds that they supposedly have invested from the funds that they raised in their filing with the SEC. The US government has since obtained an emergency court order to freeze Mr. Zaslavskiy’s as well as his companies’ assets.

The SEC, in a press statement, stated that it believes these to be the first of the frauds to occur with initial coin offerings but certainly not the last.

Kevin Roose, a columnist for the New York Times gives a very apt description of an ICO. Taking the example of a scenario wherein a friend is constructing a casino and he approaches you to invest in this venture. As equity we are offered casino chips for the value invested. These chips are redeemable to be used directly in any casino game when construction completes. 

Adding another variable to the equation, the value of these chips isn't fixed, i.e., they go up and down based on the casino's popularity quotient, the number of gamblers in the casino and the regulations surrounding the casino industry. Now this friend who has approached us is someone we have just met online, his/her name also might be fake, he/she might not have the required expertise to undertake a casino construction project and he/she cannot be sued for fraud if he/she steals your money and uses it to buy a Porsche instead. That is what an ICO is.

The SEC can still very much prosecute the ICO for fraud. The Securities Exchange Commission has for some time now been very concerned about the ICOs. It released a public warning by the mode of issuance of an investor alert, informing the future and present investors to be extremely cautious and wary of unsolicited offers and claims of unbelievably high returns in July this year.

Andrew M. Calamari, a spokesperson for the SEC agrees with the court ruling on the complaint that Mr. Zaslavskiy lured investors with fraudulent promises of extremely high returns from novel technology. He also further cautions the future investors to be wary and doubly sure of the companies touting ICOs to be the way of generating outsized returns.

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