And so it begins.
For the first time ever, the Securities and Exchange Commission has issued a violation to a hedge fund manager for its investments in digital assets. They found Crypto Asset Management, or CAM, a California based crypto portfolio manager, operating as an unregistered investment company while claiming to be SEC regulated. Further, the SEC says CAM was falsely marketing itself as the “first regulated crypto asset fund in the United States.”
Over a four month public offering last year, CAM’s Managing Director Timothy Enneking raised upwards of $3.6 million based on this claim, and invested 40 percent of the fund’s assets into cryptocurrencies, thus operating the fund as an unregistered investment company. CAM received a cease and desist order, with which they complied, and the SEC fined them $200,000. CAM agreed to pay the fine without admitting to or denying the SEC’s findings, and offered buy backs to investors.
The Fall of TokenLot, the SEC’s Second Target
Tuesday the SEC also charged Michigan LLC TokenLot, which closed down at the end of July, with operating as unregistered broker-dealers. TokenLot called themselves an “ICO Superstore,” which co-founders Lenny Kugel and Eli L. Lewitt promoted as a space to buy into ICOs and trade tokens on a secondary market. Through their platform, over 6 thousand retail investors traded more than 200 different tokens which, by the SEC’s standards, qualified as securities and therefore fell under SEC regulations.
It’s the first time the SEC has enforced last year’s DAO Report, which warned traders that digital assets like DAO tokens would be considered securities, and subject to regulations as such. After the SEC’s charges, TokenLot started refunding payments to investors for unfilled orders and began the process of closing down, also without admitting to or denying charges.
Lightened penalties include $471,000 for the company, plus interest, and $45,000 each in personal fines to Kugel and Lewitt.
“The penalties in this case reflect the prompt cooperation and remedial actions by TokenLot, Kugel, and Lewitt,” says SEC Co-Director of Enforcement Division Steven Peikin. “TokenLot, Kugel, and Lewitt provided valuable information to Commission staff, stopped the conduct, and refunded money to investors.”
Making Examples, or Starting a Crackdown?
The SEC could be making examples of TokenLot and CAM, but there could be more of a crackdown coming.
The charges emerge after the SEC subpoenaed 80 cryptocurrency firms earlier this year, including the $100 million cryptofund of Michael Arrington, founder of TechCrunch. While not indicators of misdoings, the subpoenas were tells that the SEC was working out its terms for coming indictments.
Securities Investigations Extend Beyond US Borders
Also earlier this year, the North American Securities Administrators Association (NASAA), an international investor protection agency, initiated ‘Operation Cryptosweep’ to target fraudulent ICOs and crypto investment products across the US and Canada.
“While not every ICO or cryptocurrency-related investment is a fraud, it is important for individuals and firms selling these products to be mindful that they are not doing so in a vacuum,” says Joseph P. Borg, President of NASAA and Director of Alabama Securities Commission. “State and provincial laws or regulations may apply, especially securities laws. Sponsors of these products should seek the advice of knowledgeable legal counsel to ensure they do not run afoul of the law. Furthermore, a strong culture of compliance should be in place before, not after, these products are marketed to investors.”
The SEC’s own first strikes arrive amidst a crypto slump, as several leading coins, including Bitcoin, Ethereum, and Ripple, are exploring new lows.
“U.S. securities laws protect investors by subjecting broker-dealers and other gatekeepers to SEC oversight, including those offering ICOs and secondary trading in digital tokens,” Stephanie Avakian, Co-Director of the SEC’s Enforcement Division says. She encourages developers of businesses in digital asset trading to contact the SEC “for assistance in analyzing registration and other securities law requirements.”
Any of the many crypto firms still operating unregistered would be wise, at this point, to square up.