SEC's New Cyber Unit Moves to Tackle 'Scam' Coin Offering

“This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing,” Robert Cohen, the chief of the new unit, said in the release. “We acted quickly to protect retail investors from this initial coin offering's false promises.”

Former SEC lawyers said that the enforcement action was not surprising, given the commission's messaging in recent months, and that it is unlikely to shed more light on how the SEC determines whether an ICO is a security. Although the complaint alleges that the PlexCoin ICO was an unregistered security offering, it does not give a detailed analysis to back up that argument.

“It's clear out-and-out fraud that has the ICO component, so it fits in with what the SEC has been talking about in different speeches,” says Michael Dicke of Fenwick & West, who was previously an associate regional director for enforcement in the SEC's San Francisco office.

“The question is what [will the SEC do] if there's not fraud, but there's a registration violation,” Dicke adds. “That's unanswered.”

Nicolas Morgan, a partner at Paul Hastings and former senior trial counsel in the SEC's enforcement division in Los Angeles, also says he expects the commission to pursue more cases involving serious fraud claims in the future — rather than expending its limited resources on cases that touch on more nuanced elements of securities law.

At the same time, Morgan says he anticipates the SEC is looking closely at unregistered services that allow secondary trading of digital tokens like PlexCoin. Its complaint notes that PlexCoin “currently trades under the symbol PXN,” although doesn't name any digital token exchange in particular. “I think the next shoe to drop will be what does the SEC do when it comes to exchanges,” Morgan says.

The Cyber Unit was set up by the commission last September, with a heavy focus on blockchain distributed ledger technology and ICOs, the spread of false information online, hacking and threats to trading platforms. The unit is headed by Cohen and Valerie Szczepanik, who leads the SEC's roughly 75-member distributed ledger working group.

The complaint by the SEC alleges that the tokens the Lacroix offered investors were, in fact, unregistered securities and that numerous claims about their potential value were based on false statements. It says that he and Paradis-Royer have obtained some $15 million from thousands of investors since launching the ICO in August.

The coin offering claimed to offer investors “tokenized currency” that would appreciate in value, with early investors reaping “outlandish rewards of 1,354% in 29 days or less,” the complaint says. The SEC also alleges that Lacroix sought to hide his involvement in the project because he was “a known securities law violator in Canada.”

The case is the latest example of the SEC making clear that blockchain-enabled token offerings are not outside the scope of its regulatory power. Last July, it issued a report following an investigation of an organization called The DAO concluding some digital token offerings are securities under applicable law. It also issued an “Investor Alert” in August warning retail investors about ICOs, stressing that fraudsters “often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams.”

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Ben Hancock is a reporter for The Recorder, the San Francisco-based ALM affiliate publication of Cybersecurity Law & Strategy. He can be reached at [email protected]. On Twitter @benghancock.