Online Violation of Securities Regulations

Online Violation of Securities Regulations

On December 1, 2017 the United States securities regulator, the Securities and Exchange Commission (the “SEC”) filed a complaint and froze assets owned by PlexCorps, a Canadian company, and its owners, two Canadian residents. Not only was this a cross-border, online security violation, but it also marks the first case for the SEC’s new Cyber Unit, which was just created in September of 2017. Despite the popular idea that cryptocurrencies and blockchain transactions are “decentralized,” the SEC has taken the stance that such technologies may still be subject to traditional securities laws. Its Cyber Unit focuses on cyber-related misconduct, including the spread of false information through electronic and social media, blockchain, and cryptocurrency.

The PlexCorps case highlights many of these issues. PlexCorps purported to be making an “initial coin offering” or “ICO.” This is essentially a funding device where investors purchase digital coins or tokens, similar to bitcoin or Ethereum. These new technologies have gained increased notoriety, especially after bitcoin’s recent price escalation.

Feeding off this new mainstream interest in cryptocurrency, PlexCorps and its owners made publications on their websites, Facebook, Twitter, and via a “whitepaper” that the SEC alleged contained statements which were “materially false or misleading, or omitted material information.” The most important aspects were that investors were: (1) promised “a return of 1,354% on your investment;” and (2) not informed that the man behind PlexCorps was a “known recidivist securities law violator.” These publications were made online and were not only viewable by people in the United States, but were in fact seen by US victims. This caused the Canadian company and residents to be subject to the SEC’s jurisdiction in the United States. As evidence that this was a fraud, rather than a legitimate investment, the SEC pointed to the fact that some of the investor money was used to fund home improvement projects for the company owners, rather than being invested in the company’s development, as promised.

These are not just international issues either. The SEC has also gone after domestic companies as well. It recently entered into a settlement agreement with Munchee, Inc., a California company that was offering unregistered securities in the form of digital tokens. In fact, these issues are becoming so mainstream that the SEC has even issued a warning to potential celebrity endorsers that they must disclose the nature, scope, and compensation amount they receive for making such endorsements.

New ventures are exciting, and the internet makes reaching people across the globe easier than ever, but such activities are not risk-free. Founders must be vigilant not to run afoul of securities regulators, especially when acting in the online space. Even when acting lawfully in their own jurisdiction, their transactions may subject them to other jurisdictions, whose laws may differ. Investors must also be vigilant when dealing with new technologies and sophisticated investments in order to avoid becoming victims. Contact Mark E. Peterson (mpeterson@diepenbrock.com) or Justin M. Borrowdale (jborrowdale@diepenbrock.com) for assistance navigating securities regulations.