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ICO Fraud: SEC Defense Strategies

Blockchain attorney Dr. Nick Oberheiden

Attorney Nick Oberheiden
ICO Fraud Team Lead
Blockchain attorney Alina Veneziano

Attorney Alina Veneziano
ICO Fraud Team Lead

Introduction to ICOs

ICOs (or Initial Coin Offerings) are increasingly popular today as cryptocurrency awareness and use increases drastically among society, businesses, and investors. ICOs are meant for raising capital to fund cryptocurrency projects.

During an ICO, investors exchange regular money (FIAT currency) for the token/coin on offer. These coins/tokens (digital assets) are perceived to increase in value in the future and offer investors a return.

While ICOs offer both investors and the persons/entities behind them with opportunities, they come with risks such as market manipulation, fraud risks, and money laundering opportunities.

ICO fraud is a common reason for SEC investigations that can easily progress into criminal prosecution by the DOJ (Department of Justice) or FBI (Federal Bureau of Investigation). A criminal investigation can result in serious criminal penalties, including hefty fines and jail time.

If you/your company is subjected to an ICO fraud investigation, be proactive and retain the most seasoned federal defense attorney you can find. Such an attorney will help you with evolving policy issues, regulatory landscape, and other ICO issues. He/she can also prepare SEC defense strategies to challenge the ICO fraud allegations facing you.

ICOs as a Funding Tool

The SEC understands the role of ICOs in raising capital and providing investment opportunities. An initial coin offering involves creating new tokens/coins that are sold to interested parties (investors) for fiat currency.

Advantages of an ICO to Raise Money

Notable advantages of using ICOs as funding tools include:

  • They are a quick way of raising capital
  • Investor returns are likely to increase quickly when the token/coin value increases
  • They help bypass strict and challenging regulations common in traditional funding methods

Disadvantages of ICOs

The most notable include, but aren’t limited to:

  • Potential for fraud
  • Money laundering risks
  • Market manipulation

Regulatory Problems Associated with ICOs

ICOs face many regulatory challenges. First and foremost, since ICOs are considered securities, the SEC has jurisdiction to oversee ICOs and enforce federal securities laws on registration, disclosure, and reporting.

ICOs need SEC registration unless they enjoy an exemption. The offer (coin/token) also counts as a security like a share, stock, or bond for regulatory purposes. However, ICOs are more prone to fraud risks. ICO scams are more common today than any other scams affecting other securities.

What’s more, insufficient regulation and the anonymous nature of some offers leaves investors exposed with very little to no recourse.

ICO Fraud Investigations and Responses

Federal agencies are continuously responding to ICO fraud. Former SEC Chairman Jay Clayton has been on record stating that ICOs come with new risks and challenges even if the offerings are legal. These risks are present for everyone, from the companies issuing the coins/tokens to investors. Even if the entities behind the issue are licensed, the trading could be unfair. The market could also be manipulated, and investors may also be restricted to sell if they want to. What’s more, there are theft and hacking risks, according to Clayton.

The FBI is of the same opinion. In April 2020, the agency issued a press release warning investors of the high risk of ICO fraud linked to the coronavirus pandemic. The economic difficulties that came with the coronavirus pandemic increased crime and fraud risks as criminals preyed on economic uncertainty to launch investment scams globally.

ICO fraud can be attributed to few regulations and the online landscape that ICOs operate in. What’s more, international transfers are easier now than ever. Increased federal agency scrutiny hasn’t helped, as many start-ups are at risk of noncompliance and federal investigations or prosecution.

“Regulations on virtual currencies and digital assets as a whole are constantly evolving. Investors, brokers, dealers, SEC-registrants must be aware of their compliance obligations on ICOs since the DOJ and SEC are constantly scrutinizing ICO activities more than typical public offerings. Most importantly, ICO-fraud is likely to increase. Federal agencies are also planning to increase their aggressiveness when investigating, enforcing, and prosecuting SEO fraud cases. This will see an increase in severe punishments, including jail time. A seasoned ICO fraud defense lawyer can help you tackle SEC investigations and charges successfully." – Dr. Nick Oberheiden (Founding Attorney, Blockchain Lawyer)

ICO Fraud Defense Strategies

The SEC investigates ICO fraud cases. However, it seeks help when prosecuting such cases. The agency coordinates the investigation process with other agencies and refers cases to the Department of Justice, which pursues criminal charges.

These charges can result in criminal and civil penalties. If criminal charges are initiated, the perpetrators of ICO fraud can be jailed. The importance of retaining an ICO fraud defense attorney can’t be overlooked. Most importantly, the attorney must have vast knowledge of ICOs and other matters in the ever-expanding cryptocurrency space.

Defense strategies against ICO fraud charges depend on many factors, including the unique facts of the case. A good criminal defense strategy raises doubt on the conduct of a perpetrator if they committed the ICO fraud in question or not. Here are notable ICO defense strategies for tackling ICO fraud charges:

Insufficient Evidence

ICO fraud charges must be accompanied by sufficient evidence for the charges to lead to hefty fines or jail time for perpetrators. Challenging the evidence provided in the government case file is an effective defense strategy. The government must prove you are guilty beyond reasonable doubt. If the evidence lacks key elements, the ICO fraud charges can’t result in a conviction.

Cooperating on Information Requests Only

Government agencies can’t force you or your employees to cooperate more than abiding by information requests. Cooperation is important; however, it is limited in scope. During active investigations, telling your employees to act on information requests only and to seize from saying anything prevents instances of supplying incriminating information. You should also refrain from speaking to authorities in the absence of your lawyer.

Internal Audit

Conducting your own internal audit is also a great ICO fraud defense strategy since internal audits uncover what federal agencies have against you, helping your legal team to prepare better.

Argue on Compliance

Arguing that your ICO complied fully with applicable securities laws is also effective in many cases. Since federal agencies base most of the ICO fraud cases on noncompliance, having accurate records of your filings, planning process, investor disclosures, and other compliance information will make it hard for the prosecution to argue fraud.

Establish a Corrective Action Plan

Some ICO fraud allegations can be dealt with by establishing and implementing a corrective action plan. If you are non-compliant in some way, attempting to get compliant can show federal authorities of your goodwill to be fully compliant, resulting in lesser or no charges.

Work with a Defense Attorney

You shouldn’t face ICO fraud allegations without an experienced ICO defense attorney. Securities violations are complex. You need expert legal help to craft the best defense strategy. Good defense attorneys gather details of a case and craft comprehensive strategies that cover all possibilities.

Hiring an ICO fraud defense lawyer is an effective defense strategy in itself. You can decide to follow an aggressive or collaborative approach based on the facts of the case and whether there are options to go to trial or settle.

Summary

ICOs are great tools, with notable advantages for those behind them and those who choose to invest in them. However, they have compliance obligations that go beyond those in traditional offerings. What’s more, there lacks comprehensive regulation on ICOs, which opens them up to fraud risks. And regulations keep changing.

Federal agencies are also constantly focusing on ICOs, given the increasing ICO scams. The best approach to ICO fraud is to be proactive and retain a defense attorney capable of determining compliance issues, the role of government agencies in ICOs, your criminal liability (if any), and crafting the best ICO fraud defense strategy to offer you a reasonable chance of fighting SEC investigations and charges successfully.