Earlier this week, the Securities and Exchange Commission’s new Cyber Unit filed charges in its very first cyber fraud case, and its target was PlexCoin, a cryptocurrency startup based on the app platform Ethereum, and the company’s founder, Dominic Lacroix. PlexCoin bills itself as “a new revolutionary operating structure [that] is safer and much easier to use than any other current cryptocurrency.”
At issue is an initial coin offering (ICO) offered by PlexCoin, which the SEC alleges defrauded investors. The commission obtained an emergency asset freeze to halt the ICO, which it said had “raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month.” The SEC described Lacroix as “a recidivist Quebec securities law violator” and also filed charges against his partner Sabrina Paradis-Royer.
The SEC has previously warned investors concerning the dangers of investing in cryptocurrencies and announced that ICOs involve the sale of securities, at least in some cases. However, PlexCoin represents the first action taken by the SEC in connection with an ICO. The PlexCoin charges are also the first filed by the SEC’s new Cyber Unit. The unit was formed in September to “focus the Enforcement Division’s cyber-related expertise on misconduct involving distributed ledger technology and initial coin offerings, the spread of false information through electronic and social media, hacking and threats to trading platforms.”
The action is focused on the anti-fraud provisions of the Securities Act, but the registration requirements of the act are implicated as well, and this action could have significant ramifications for legitimate ICOs. Increased regulatory oversight will impose additional costs on coin offerings and could cool a cryptocurrency market that continues to heat up as Bitcoin breaks the $11,000 barrier — more than ten times its value at the start of the year. Expect major changes from the SEC’s Cyber Unit in this rapidly evolving area.