US SEC successfully halts fraudulent ICO

Last week, the United States Securities and Exchange Commission obtained an emergency court order halting a planned initial coin offering (ICO) and ongoing pre-ICO sales by Blockvest LLC and its founder, Reginald Buddy Ringgold, III (aka Rasool Abdul Rahim El). The Blockvest order is the second court action in October from the SEC relating to an ICO and seems to be part of a larger trend of heightened enforcement around ICOs in general.

The SEC’s complaint

The SEC’s complaint alleges that Blockvest falsely asserted that its ICO had received regulatory approval from various agencies, including the SEC, the CFTC and the National Futures Association (NFA). According to the complaint, Blockvest and Ringgold fraudulently placed the SEC’s seal on investor materials without permission, which is a violation of US federal law. Apparently, investor materials for the ICO and related pre-ICO sales also falsely claimed that the Blockvest sponsored cryptocurrency index fund was “licensed and regulated” and promoted by the “Blockchain Exchange Commission,” a fake agency invented by Ringgold, complete with a counterfeit seal resembling that of the SEC.

The complaint alleges even further misconduct by Blockvest who apparently also misrepresented their connections to a well-known accounting firm and continued their fraudulent conduct even after the NFA sent a cease-and-desist letter to stop them from using the NFA's seal and from making false claims about their status with that organization.

The SEC’s stance

This is not the first step taken by to prevent crypto-related scams – for example in the SEC v. Jeffre James the SEC took action against the Saint James Holding and Investment Company Trust and its sole trustee, Jeffre James in relation to an alleged “pump-and-dump” scheme involving an ICO (artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price).

Following the Blockvest complaint, the SEC issued a statement emphatically confirming that:

"the SEC does not endorse investment products and investors should be highly skeptical of any claims suggesting otherwise."
Robert A. Cohen, Chief of the SEC Enforcement Division's Cyber Unit

The emergency relief

In response to the SEC’s request, the US District Court for the Southern District of California issued an order freezing defendants' assets, among other orders for emergency relief.

The order also temporarily prohibits Blockvest and Ringgold from violating the antifraud provisions and securities registration provisions of the US federal securities laws.

Potential market consequences?

Whilst Blockvest is a particularly egregious example of fraudulent and misleading behavior by promoters in the ICO market, according to a report prepared by Satis Group Crypto Research, as many as 81% of ICOs launched since 2017 have turned out to be scams. The scale of fraud in ICOs appears to have had a serious negative impact on the US ICO market as investors pause to ask more. Last year, for instance, the US share of ICO fundraising was 32% of overall global ICO issuance - in 2018, this has fallen to 10%.

The prevalence of fraud has also been coupled with regulatory uncertainty around the tokens being offered, further diminishing investor enthusiasm for new ICOs. In recent months, ICO volumes have declined dramatically – as much as 90% year over year by some accounts.

Response of other regulators

The Blockvest incident has prompted several reactions by other regulators in an effort to support the SEC in ensuring that future investors do not succumb to similar fraudulent conduct in the future.

The SEC's Office of Investor Education and Advocacy and the US Commodity Futures Trading Commission's Office of Customer Education and Outreach have jointly issued an investor alert on the use of false claims regarding SEC and CFTC endorsements.

What happens next?

A hearing to consider issuing a preliminary injunction and continuing to freeze Blockvest and Ringgold’s assets is scheduled for October 18, 2018. We will continue to provide updates once the results of that hearing are known.

The Blockvest order reflects the SEC’s ability to successfully halt a fraudulent ICO before any real damage is done to investors. We expect to see more serious regulatory scrutiny of past ICOs and enforcement action taken by US regulators against fraud and price manipulation in the cryptocurrency markets in the coming months.