The U.S. Securities and Exchange Commission (SEC), which holds primary responsibility for enforcing federal securities laws and regulating the nation’s stock exchanges, obtained a court order halting an allegedly fraudulent initial coin offering (ICO), which targeted retail investors to fund what was claimed to be the world’s first “decentralized bank.”
According to the SEC’s complaint filed in federal district court in Dallas on January 25 and unsealed as of late yesterday, Dallas-based AriseBank used social media, a celebrity endorsement, and other wide dissemination tactics in order to raise what it claims to be $600 million of its $1 billion goal. This in a matter of two months.
AriseCoin’s public sale commenced around December 26, 2017, and was originally scheduled to conclude on January 27, 2018, with distribution to investors on February 10.
Stepping Up Action
The move to halt this ICO follows announcements in December the SEC to halt an ICO by Munchee Inc., a California-based company selling digital tokens to investors to raise capital for its blockchain-based food review service (before any tokens were delivered and refund investors).
On 4 December, the agency initiated an emergency asset freeze to halt a fast-moving ICO scam that had raised up to $15 million from thousands of investors since last August. This latter ICO, organized by a recidivist Quebec securities law violator, Dominic Lacroix, and his company PlexCorps, falsely promised a 13-fold profit in less than a month.
Charges in this action in early December were the first filed by the SEC’s new Cyber Unit, which was formed in September to focus the Enforcement Division’s cyber-related expertise on misconduct involving distributed ledger technology and ICOs, the spread of false information via electronic and social media, hacking and threats to trading platforms.
Action by the SEC also coincided with media reports that the U.S. Commodity Futures Trading Commission (CFTC) had sent subpoenas on December 6 to virtual-currency venue Bitfinex and Tether, a company that issues a widely traded coin and claims it’s pegged to the dollar.
Conceptual image of a burning Bitcoin. (Photo:Ulrich Baumgarten via Getty Images),
According to a communiqué from the SEC it is understood that AriseBank and its co-founders Jared Rice Sr. and Stanley Ford allegedly offered and sold unregistered investments in their purported “AriseCoin” cryptocurrency by depicting AriseBank as a “first-of-its-kind” decentralized bank.
The bank claimed that it would be offering a variety of consumer-facing banking products and services using over seven hundred different virtual currencies. Furthermore, their sales pitch claimed that it had developed an algorithmic trading application that automatically trades in various cryptocurrencies.
The SEC alleges that AriseBank falsely stated that it purchased an FDIC-insured bank, which enabled it to offer customers FDIC-insured accounts and that it also offered customers the ability to obtain an AriseBank-branded VISA card to spend any of the 700-plus cryptocurrencies. The FDIC (Federal Deposit Insurance Corporation) is a U.S. government corporation providing deposit insurance to depositors in US banks).
AriseBank also allegedly omitted to disclose the criminal background of key executives.
Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, commenting said: “We allege that AriseBank and its principals sought to raise hundreds of millions from investors by misrepresenting the company as a first-of-its-kind decentralized bank offering its own cryptocurrency to be used for a broad range of customer products and services.
She added: “We sought emergency relief to prevent investors from being victimized by what we allege to be an outright scam.”
Steven Peikin, Co-Director of the SEC’s Enforcement Division, noted that this is the first time the Commission has sought the appointment of a receiver in connection with an ICO fraud.
“We will use all of our tools and remedies to protect investors from those who engage in fraudulent conduct in the emerging digital securities marketplace,” he stressed.
The Director of the SEC’s Fort Worth Regional Office, Shamoil T. Shipchandler, remarked that: “Attempting to conceal what we allege to be fraudulent securities offerings under the veneer of technological terms like ‘ICO’ or ‘cryptocurrency’ will not escape the Commission’s oversight or its efforts to protect investors.”
The court approved an emergency asset freeze over AriseBank, Rice, and Ford and appointed a receiver over AriseBank, including over its digital assets.
The SEC intervened to protect the digital assets before they could be dissipated, thus enabling the receiver to immediately secure various cryptocurrencies held by AriseBank including Bitcoin, Litecoin, Bitshares, Dogecoin, and BitUSD.
The SEC indicated that it seeks “preliminary and permanent injunctions, disgorgement of ill-gotten gains plus interest and penalties”, and bars against Rice and Ford to prohibit them from serving as officers or directors of a public company or offering digital securities again in the future.
Assistance in connection with the investigation into AriseBank was provided by the Federal Bureau of Investigation (FBI), U.S. Attorney’s Office for the Northern District of Texas, Federal Deposit Insurance Corporation, U.S. Patent and Trademark Office, as well as the Texas Department of Banking.
As to the merits of a decentralized bank in the cryptocurrency space, Siim Õunap, an FX and crypto markets trader said: “With the usage of crypto becoming increasingly popular, it is inevitable that there will be a decentralized (crypto)bank in the near future. And, as with Bitcoin, the first one will take the world in a storm.”
The Estonian based in Tallinn added: “It is a service that is needed with more and more people requiring access to a crypto bank and increasing numbers of businesses wanting to accept crypto payments. That excitement aside, the better something looks, the more we have to be aware of the legitimacy of it.”
Despite the efforts of the SEC to raise the ante in clamping down on ICO scams and other securities abuses, they are unlikely to be the last we will see. Nevertheless, investors should take on board some sound advice before they get into such ventures.
As Charles Hoskinson, a former Ethereum co-founder who in 2015 founded IOHK, a leading blockchain R&D company, said to me in relation to investing in ICO’s: “Before purchasing an ICO my first piece of advice would be to understand the project’s whitepaper and the product or service. The reality is that if you cannot understand the whitepaper then don’t buy into it.”
In addition, the American from Boulder, Colorado, whose IOHK team over the past two years designed Cardano, an industrial-strength blockchain, stressed that potential investors should never put more money into anything – ICOs included – than they can afford to lose and understand that these vehicles are tremendously speculative.”
Additionally you should actually know the team behind any project. “They have to be interactive, one has to know and understand their history and background, their incentives…but also more broadly the team’s philosophy,” Hoskinson said. Understand too the evolution of the product or service and the natural demand for it, as well as according to Hoskinson the “technological risk and the execution risk for the project.”
For investors in the AriseBank ICO who believe they may be a victim are asked to report it to the SEC as a tip or complaint.
The SEC’s Office of Investor Education and Advocacy also issued an Investor Alert last August warning investors about scams of companies claiming to be engaging in ICOs.