In a ten page letter that previews the Financial Industry Regulatory Authority’s (FINRA) priorities for 2018, initial coin offerings (ICOs) and transactions involving cryptocurrencies. This follows previous warnings by both the Securities and Exchange Commission (SEC) and FINRA about the risks associated with investing in ICOs and virtual currencies, including Bitcoin. SEC Chairman Jay Clayton and commissioners Kara Stein and Michael Piwowar issued a statement applauding the North American Securities Administrators Association’s reminder to investors that sellers of securities must follow laws applicable to them. According to the SEC statement, “Unfortunately it is clear that many promoters of ICOs and others participating in the cryptocurrency-related investment markets are not following these laws…the SEC and state securities regulators are pursuing violations, but we again caution you that, if you lose money, there is a substantial risk that our efforts will not result in a recovery of your investment.”
FINRA noted in its paper that it will continue to evaluate the cybersecurity programs of regulated entities to confirm that the firms are protecting investors’ personal and sensitive information from internal and external threats and that they are adequately preparing for and responding to cyber-attacks.
The risk associated with ICOs was further magnified this week when defendants in a case brought by the SEC in New York alleged that the Court did not have personal jurisdiction over them because they reside in Quebec and that they took measures to exclude U.S. citizens from the ICO. The SEC claims that the couple masterminded a fraudulent ICO that raised $15 million from investors. The offering was of a blockchain-based cryptocurrency “PlexCoin” which was sold through PayPal, Square and Stripe. The defendants allege that the use of U.S. payment services does not subject them to the jurisdiction of the Court.
The SEC alleges that over 1,500 investors in the U.S. were duped by the defendants and the ICO.