SEC steps up scrutiny of digital coin sales with order to freeze 'PlexCoin' founders' assets

Key Points
  • The Securities and Exchange Commission says it's obtained an emergency court order to freeze assets of those behind an initial coin offering that falsely promised a thirteenfold profit in less than a month.
  • Under that false promise, PlexCorps had raised up to $15 million from thousands of investors since August, the SEC says.
  • The SEC has become increasingly vocal about token sales over the last several months.
Jay Claton testifies before the Senate Banking Committee during his confirmation hearing to be chairman of the Securities and Exchange Commission in the Dirksen Senate Office Building on Capitol Hill March 23, 2017 in Washington, DC.
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The Securities and Exchange Commission is getting tougher on token sales.

The agency said Monday it has obtained an emergency court order to freeze the assets of two individuals and a company to "halt a fast-moving Initial Coin Offering (ICO) fraud."

PlexCorps raised up to $15 million from thousands of investors since August by selling "securities called PlexCoin on the internet" and "falsely promising a 13-fold profit in less than a month," the SEC said in a release.

Although PlexCorps has 10,350 "likes" on Facebook, the company has no whitepaper available on its website. The company's latest Facebook post from Friday boasted to "dear members" how PlexCoin was up 698.03 percent at 73 cents on CoinMarketCap as far and away the top gainer. PlexCoin was worth 8.5 cents Monday, according to CoinMarketCap.

The SEC's cyber unit has filed charges in a federal court in Brooklyn, New York, against Dominic Lacroix, who the agency described as a repeat violator of Canadian securities law, and his company, PlexCorps. The SEC also charged Lacroix's partner, Sabrina Paradis-Royer.

"This is an escalation of [the SEC's] actions, and they are showing their intentions. It's a good signal for the market they will not tolerate abuses and scams," William Mougayar, organizer of The Token Summit conferences in New York and San Francisco, said in an email.

Source: CoinDesk

The asset freeze is the latest SEC effort to increase its oversight of initial coin offerings, a hot fundraising trend that gained popularity over the summer. Industry estimates show early stage start-ups have raised well more than $3 billion this year by selling digital coins. The coins, based on the same blockchain technology as skyrocketing digital currency bitcoin, purport to give investors future value in return for monetary contributions.

It's unclear whether the coins are utility tokens or securities that would fall under the SEC's oversight. Many of the projects also barely exist beyond a whitepaper. As a result, many start-ups have prevented U.S. residents from officially participating in the token sales. China also banned initial coin offerings in September.

Meanwhile, the SEC has become increasingly vocal on initial coin offerings.

In late July, the agency indicated securities law may apply to digital coin offerings and issued an investor bulletin warning about the risks of participating in token sales.

Then in August, the SEC temporarily suspended trading in three tiny stocks due to questions about the companies' claims regarding investments in initial coin offerings or other token-related news. Some companies' stocks have leaped dramatically after news about an investment, name change or business link to cryptocurrencies.

The following month, the commission launched the cyber unit to increase enforcement on cyber-based threats to retail investors, including "violations involving distributed ledger technology and initial coin offerings." Monday's news of an asset freeze on an ICO founder was the cyber unit's first case.

It "is exactly the kind of misconduct the unit will be pursuing," Robert Cohen, chief of the SEC's Cyber Unit, said in a statement. "We acted quickly to protect retail investors from this initial coin offering's false promises."

The SEC on Sept. 29 froze the assets of a businessman and his companies who were charged with defrauding investors with two initial coin offerings.

On Nov. 1, the commission also warned that celebrity endorsements of initial coin offerings may be illegal if the celebrities do not disclose how they are benefiting.

As a result of increased scrutiny from the SEC, and revelations of issues with high-profile ICOs earlier this year, the pace of token sales has slowed.

As of Wednesday, November was on track to be the slowest month for ICOs since August, according to industry analytics firm TokenData. The fundraising success rate has also fallen from 41 to 57 percent in the April-to-June period to 23 percent in November, the data showed.

"I think what's changed recently is they are spending more time on the legal aspect, so they are not developing these ICOs as quickly as they were before," Mougayar said in a phone interview last month. "The SEC has been making calls to certain high-profile ICOs and asking questions."

PlexCorps did not immediately respond to a request for comment.