facebook linked in twitter

NOTICE: OFFICE CLOSURES

Due to weather conditions, our Tallahassee offices will be closed until Thursday, October 11, and will reopen on Friday, October 12. Status updates will be provided as necessary. Inclement weather line is 850-907-2525.

The LatestView All

October 4, 2018

Nelson Mullins Broad and Cassel’s Paul DeMuro Elected to Medical Group Management Association Board
close

Investigations

June 6, 2018

Continuing Enforcement Trend, SEC Unseals Complaint Against California “Blockchain Evangelist” for Fraud Surrounding ICO

By Steven H. Joseph, Robert L. Lindholm, Matthew G. Lindenbaum

Continuing its trend of cracking down on allegedly fraudulent initial coin offerings (“ICOs”), the SEC unsealed a Complaint last week against Michael Stollaire, a self-described “blockchain evangelist,” and his companies Titanium Blockchain Infrastructure Services, Inc. (“TBIS”) and EHI Internetwork and Systems Management, Inc. alleging violations of the antifraud and registration provisions of the federal securities laws. The SEC obtained a court order halting the $21 million ICO, freezing assets, and placing TBIS into receivership.

The Complaint describes a “create and inflate” scheme to pump up the value of “BAR,” the digital asset offered through the ICO, at the time of issuance and for subsequent resale. The scheme included a “social media marketing blitz” that allegedly falsely touted fabricated corporate client testimonials and would-be customers of TBIS’s IT services, including Apple, IBM, GE, Intel, eBay, Microsoft, Universal, and Disney and the Federal Reserve. After completing the ICO and receiving letters demanding that Stollaire and TBIS cease using companies’ names and logos, TBIS announced that 16 million BAR had been taken from TBIS digital wallets and announced the creation of a second digital asset, TBAR, to replace BAR. The Complaint noted that after the reported theft, Stollaire switched his business model to touting connections to “billion dollar companies” in non-U.S. emerging markets and claiming that TBAR was only available for purchase by Chinese citizens. The Complaint further alleges that Stollaire comingled ICO funds with his personal finances to pay personal credit card bills and expenses for his Hawaii condominium. Between November 2017 and January 2018 investors from at least 18 states and abroad invested $21 million in cryptocurrencies (Ether and Bitcoin) and cash based on these allegedly fraudulent claims before the SEC intervened.

The SEC’s complaint in this case is particularly interesting because it illuminates some of the difficulties investigators of ICOs are facing—including tracking the identities of investors and tracing money invested into ICOs. For example, the SEC’s Complaint suggests, but does not allege, that there actually was no theft of 16 million BAR digital assets. However, it appears the SEC did not have enough evidence to make such an allegation in the Complaint; notably, the Complaint does not provide any details about where the 16 million in digital assets went if it was not stolen. The Complaint also notes that it is not able to ascertain the total number of investors who purchased BAR because TBIS accepted investments in the form of digital assets Ether, Bitcoin, Bitcoin Cash, Litecoin, and Dash. It is clear that despite the SEC’s creation of a Cyber Unit dedicated in-part to tackling complicated investigations into the cryptocurrency industry, the complexity of the industry still presents many challenges to investigators.

This Complaint is consistent with the spate of recent ICO-related enforcement actions we have discussed on this blog. Like the Centra Tech, Inc. defendants and Maksim Zaslavskiy, Stollaire may also end up facing criminal charges. As we have previously discussed, the cryptocurrency industry is concerned that these extreme examples of “bad apples” will set bad legal precedents that mainstream, law-abiding cryptocurrency issuers will have to follow. So far, none of the recent cryptocurrency cases have generated a decision on key questions, such as whether an ICO is securities offering. We are following these cases closely and will continue to report on key developments.

Nelson Mullins can help companies and investors navigate the evolving ICO, cryptocurrency, and blockchain regulatory and legal environment. The White Collar Defense and Government Investigations Group has extensive experience responding to regulator inquiries and other government investigations, as well as representing clients in related criminal and civil litigation, including class action lawsuits. The firm’s Blockchain and Digital Currency Group and Securities and Enforcement Practice are also available to advise ICO issuers, exchanges, investors, and institutional investors on how to comply with SEC and other governmental agency registration requirements and regulations.



What's New
Idea Exchange
Top