On March 19, 2018, federal prosecutors once again reinforced the notion that cryptocurrencies can be securities, as they upheld their certainty that ICOs offered by Maksim Zaslavskiy through his companies REcoin and Diamond Reserve Club, were in fact, securities, and thus, under the SEC’s jurisdiction.
As a criminal case relating to securities fraud in the ICO sphere, the complaint against Zaslavskiy and his companies has few precedents, but it may likely have many successors.
The defendant’s original response to his accusers, back in February, was that his ICOs were not securities, and thus he could not be charged with securities fraud.
Brooklyn prosecutors decided that calling an instrument a cryptocurrency does not exclude it from the SEC’s jurisdiction, and that its true nature must be determined by examining the “economic reality of the investments as they were advertised.”
After carrying out such an analysis, the Eastern District prosecutors determined REcoin and Diamond were ipso facto securities.
According to the SEC complaint, from July 2017 to March 2018, Zaslavskiy used his two companies to raise in excess of $300,000 from investors, “through various material misrepresentations and deceptive acts relating to supposed investments in digital ‘tokens’ or ‘coins’ offered, first by REcoin, then by Diamond, during the ICOs.”
The SEC claims the ‘tokens’ were “illegal offerings of securities,” which the company advertised as being backed by real estate for REcoin and by diamonds for Diamond Reserve Club.
Investors would supposedly see returns based on “(i) the appreciation in value of the investments Defendants would make, in the case of REcoin, in real estate assets, or, in the case of Diamond, in diamonds; (ii) the appreciation in value of the REcoin and Diamond tokens as the Companies’ businesses grew to the managerial efforts of teams of ‘experts;’ and (iii) the supposed increase in demand for the tokens,” the SEC said.
In order to market the ICOs, the defendants allegedly made several misleading statements, saying, for example, that they had raised millions of dollars for the ReCoin ICO, that they had a team of experts to decide on which diamonds and which real estate to purchase, to maximize returns for investors, and that the Diamond ICO would yield as much as 15% in returns from Diamond’s operations alone.
When the companies shut down, they told investors that the US government had forced them to do so, when in fact, according to Zaslavskiy’s own testimony, he “stopped the REcoin ICO because a token of the nature he had promised was ‘impossible to do.’”
“As the Supreme Court has recognized, Congress crafted a definition of ‘security’ sufficiently broad to encompass virtually any instrument that might be sold as an investment,” the SEC concluded.
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