November 7, 2017

SEC Charges for ICO Fraud

As of September 29, 2017, the SEC charged businessman Maksim Zaslavskiy and his two companies, REcoin Group Foundation and DRC (Diamond Reserve Club) World, with defrauding investors via a scheme involving two faux ICO’s (initial coin offerings) backed by nonexistent investments in real estate and diamonds. This event is particularly significant because it appears to be the first time that the SEC has filed actual fraud charges against an individual or entity using the ICO asset model.

Evident in the names of the two companies, REcoin claimed to be backed by real estate while DRC asserted that its legitimacy lay in the hands of investments in diamonds. Both companies reported themselves to be fully staffed with lawyers, brokers, accountants, and professionals that would assist with the investment portion of the operation when in reality it is likely that no such system was ever in place for either entity. Along with this, Zaslavskiy and REcoin are being accused of misrepresenting investor capital by a difference of approximately two million dollars. DRC purportedly also has a running tally of apparent fabrications itself, advertising that its diamond investment strategy includes discounts with product retailers for those who purchase a “membership” status. According to the SEC, there is no evidence to date that either company has made any investments or otherwise delivered on what they promised to investors. In fact, the SEC claims that the digital tokens being sold do not even exist and were not running on blockchain technology at all.

When Zaslavskiy attempted to continue to fundraise in this manner upon investigation, the SEC obtained an emergency court order to freeze the assets of Zaslavskiy, REcoin, and DRC. The SEC’s official complaint was filed in federal district court in Brooklyn, N.Y. and charges Maksim Zaslavskiy and his two companies with violating anti-fraud and registration provisions of the federal securities laws. The SEC seeks permanent injunctions and disgorgement plus interest and penalties, and for Zaslavskiy in particular an officer-and-director bar along with a bar from participating in any future offering of digital securities.

While this development is relatively standard in the grand scheme of SEC regulation, it goes to show the increasing recent trend of cracking down on the qualifications for ICOs.

Article by Julianne Dardanes 

 

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