The SEC’s Division of Enforcement (Division) released its latest Annual Report (Report) on November 2, 2018. The fiscal year that ended September 30, 2018, was a busy one for the SEC in the crypto and distributed ledger technology space, and the Report includes a discussion of the SEC’s initiatives on this front.
According to the Report, the Division remains focused on issues related to ICOs and digital assets. It observed that in just a few years, the prevalence of crypto-asset offerings, including ICOs, has exploded. But the Division cautioned that exuberance around these markets can sometimes obscure the fact that these offerings are often high-risk investments. For example, the Division warned that some issuers may lack established track records, viable products, business models, or the capacity for safeguarding digital assets from theft by hackers. And, to the disappointment of legitimate businesses in the crypto space, the Division emphasized that some offerings are simply outright frauds cloaked in the veneer of an emerging technology.
According to the Report, as of the close of FY 2018, the SEC had brought over a dozen stand-alone enforcement actions involving digital assets and ICOs. While many of these cases have involved allegations of fraud, the Division also has pursued enforcement actions to ensure compliance with the registration requirements of the federal securities laws. In the past year, the Division has also opened dozens of investigations involving ICOs and digital assets, many of which were ongoing at the close of FY 2018. On an encouraging note, however, the Division recognized the need to balance its mission to protect investors from the risk posed by fraud and registration violations against the risk of stifling innovation and legitimate capital formation.
Continuing Chairman Clayton’s theme of protecting the “Main Street Investor”, the Report also notes that the Division’s Retail Strategy Task Force, in partnership with the Division’s Cyber Unit and Microcap Fraud Task Force, as well as the Division of Corporation Finance’s Digital Asset Working Group, launched a lead-generation and referral initiative involving trading suspensions related to companies that focused on cryptocurrency and distributed ledger technology. In both FY 2017 and FY 2018, the Report notes that the SEC suspended trading in the stock of over a dozen publicly traded issuers because of questions concerning, among other things, the accuracy of assertions regarding their investments in ICOs and the operation of cryptocurrency platforms.