In its first lawsuit targeting Initial Coin Offerings (ICOs), the Securities and Exchange Commission (SEC) has filed fraud charges against the creator of the ICOs marketed as “REcoin” and “DRC.” The action, filed in the United States District Court for the Eastern District of New York on September 29, 2017, alleges that Maksim Zaslavskiy, operating through two wholly owned companies, raised over $300,000 from investors based on false claims the digital “tokens” or “coins” being marketed were backed by investments in either real estate or diamonds. According to the SEC’s Complaint, not only were funds raised by the ICO not invested in any assets, the digital tokens did not actually exist. Despite representations by Zaslavskiy, no digital tokens and actually been developed or issued on a blockchain, leaving investors with no value in exchange for their payments.
Following filing of the action, the Court quickly granted a temporary restraining order enjoining further violation of the Securities Act and freezing Zaslavskiy’s assets pending a show cause hearing on the SEC’s claims for preliminary injunctive relief. That hearing is scheduled to go forward on December 8, 2017.
While the RECoin / DRC case appears to involve outright investor fraud, the action comes at a time when SEC oversight of ICOs has become a hot issue. In a bulletin dated July 25, 2017, the SEC alerted investors that, depending on the facts and circumstances of each individuals ICO, the digital coins or tokens being offered or sold may be treated as securities subject to federal securities laws and, by extension, prosecution by the SEC.