Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC charged a businessman and two companies with defrauding investors in a pair of so-called initial coin offerings, or ICOs, purportedly backed by investments in real estate and diamonds.

The SEC alleges that Maksim Zaslavskiy and his companies have been selling unregistered securities, and the digital tokens or coins being peddled don’t really exist. According to the SEC’s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) have been told they can expect sizeable returns from the companies’ operations when neither has any real operations.

Zaslavskiy allegedly touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate.” Alleged misstatements to REcoin investors included that the company had a “team of lawyers, professionals, brokers, and accountants” that would invest REcoin’s ICO proceeds into real estate when in fact none had been hired or even consulted.

To give the appearance that the REcoin token was popular and the REcoin ICO successful, a “counter” near the top of the REcoin website stated, as of late August and early September of 2017, that over 2.8 million “REC” had been “already purchased.” Assuming this statement incorporates the REcoin ICO initial 15% discount, it implies that the REcoin ICO had raised at least $2.3 million dollars.  But, according to the complaint, this statement was false. At most, REcoin had obtained approximately $300,000 in funds from investors, accoding to the complaint.

According to the SEC’s complaint, Zaslavskiy carried his scheme over to Diamond Reserve Club, which purportedly invests in diamonds and obtains discounts with product retailers for individuals who purchase “memberships” in the company. Despite their representations to investors, the SEC alleges that Zaslavskiy and Diamond have not purchased any diamonds nor engaged in any business operations. Yet they allegedly continue to solicit investors and raise funds as though they have.

If the SEC’s allegations are true, this was a fairly low level, unsophisticated scheme. I’m not trying to take anything away from the SEC’s apparent accomplishments in this case, but I suspect there are much bigger fish out there in the ICO world and hopefully the SEC is on to them.  Perhaps the amount of money involved here was limited based on the quick SEC action.

One interesting aspect of this is to look at how fast the SEC can move. The SEC first contacted Zaslavskiy on August 15, 2017, and filed the complaint on or about September 29, 2017.  Certainly the SEC was aware of the scheme before August 15, 2017, so it is likely more than a month and a half elapsed by the time the SEC became aware of the matter and the SEC filed court papers to shut the scheme down.

No judicial finding has been made that the defendants did anything improper or violated the law.