Earlier this week, Joseph Grundfest -- a former Commissioner with the U.S. Securities and Exchange Commission (SEC) -- spoke loudly and critically against the wildly-popular fundraising mechanism known as an Initial Coin Offering (ICO). While questioning why the SEC has not been more forceful in investigating ICOs for the harm they can cause investors, Mr. Grundfest told The New York Times: “ICOs represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi. It’s more than the extent of the violation. It’s the almost-comedic quality of the violation.” His position echoes and supports the allegations in Silver Miller’s recently-filed class action lawsuit against Tezos in connection with Tezos’ July 2017 ICO that garnered from investors assets now valued at more than $800 million.
Over the past year, ICOs have become increasingly successful and widely-used as a fundraising tool for start-up companies that purport to be developing a new technology, blockchain, or distributed ledger database aimed at replacing older, less secure, and less reliable systems. While in traditional Initial Public Offerings (IPOs), a start-up company offers its investors company stock in exchange for investment capital; the ICO companies offer something different to their investors: cryptocurrency issued or managed by the start-up company in exchange for the investors’ capital, which itself is usually pre-existing cryptocurrency such as bitcoin or Ether owned by the investors. Much like capital stock, the value of each start-up company’s newly-created cryptocurrency can rise or fall with the success or failure of the start-up venture.
Mr. Grundfest’s concern -- and the concern of many other like-minded critics of ICOs -- is that the entrepreneurs promoting ICOs, and the newly-created digital currencies being offered as part of their promotions, are not being regulated by the SEC or any other governmental organization, even though what is being offered appears to fall directly within federal securities laws and the jurisdiction of governmental regulation. Speaking at the National Press Club in Washington, D.C. earlier in November 2017, Silver Miller founder David Silver offered similar thoughts and told the audience of cryptocurrency entrepreneurs and attorneys that the regulatory agencies will not care what companies call their offerings; they will only care what the companies are actually offering.
Mr. Grundfest and Mr. Silver agree that almost all ICO investors were investing not because of some future use of the computer networks purportedly being built; rather, those investors were buying-in to the start-up ventures because they were anticipating the value of the newly-created digital coins they were being given in exchange for their funds would rise in value -- a classic component of an investment, and precisely the type of thing that governmental bodies such as the SEC are in place to regulate. While some of the companies will be successful, some will not. “Is this amazing technology? Yes,” Mr. Grundfest said. “But most of the stuff we see today is total crap.”
Silver Miller currently represents the victims in class/group action lawsuits against multiple cryptocurrency exchanges (Cryptsy; Coinbase; Kraken) and recently filed the nation’s first federal court class action lawsuit against Tezos for potential regulatory violations and misrepresented solicitations in connection with Tezos’ ICO. We also represent clients investigating numerous other ICOs for similar regulatory violations and misrepresented crypto-investment offerings. If you have invested in an ICO and are concerned that your investment is in jeopardy or that you have been defrauded, contact Silver Miller contact us for a no-cost, no-obligation consultation to discuss your legal rights.
See The New York Times article:
Initial Coin Offerings Horrify a Former S.E.C. Regulator