Capital generation events can come in many different forms. For those involved in the world of blockchain, the terms ICO, STO, and DSO have most likely become common terminology. Another variant of these type of events is known as the IEO or ‘Initial Exchange Offering’.
Since first capturing investors’ attentions in early 2019, IEOs have gone on to largely replace the ICO, as they are commonly viewed as a safer means of practice. This sense of security is often due to the belief that projects are legitimate, since they are being hosted on an exchange, and that they represent better investment opportunities.
They, however, do not come free of danger. The Securities and Exchange Commission (SEC) has recently released a notice/warning to those that have taken, or are thinking of taking, part in an IEO.
In their notice, the SEC clearly iterates that ‘there is no such thing as an SEC-approved IEO’. Even if not making this claim, the SEC warns that many IEOs may be selling securities disguised at utility tokens (intentionally or not).
Whats the Difference?
When IEOs were first rising in popularity, we were fortunate to have guest contributor, Liza Aizupiete (Managing Director at Fintelum), share her thoughts. In her contribution, Aizupiete touches on the differences between what constitutes an ICO versus an IEO.
Are They Worth Your Time?
Our very own Antoine Tardif, CEO of Securities.io, also took the time to pen his thoughts on the recent performance of IEOs. His findings led him to the conclusion that, “what is currently more important than the actual project being listed, is where the project is listed. We anticipate that once regulated security tokens increase in popularity, that IEOs may be an enticing option to list these security tokens on regulated exchanges. This would be similar to how stock exchanges currently operate.”
While the SEC address a variety of points in their notice, there are two statements in particular that shed light on to their stance. The following are excerpts from their notice, demonstrating this.
Is the IEO a securities offering?
“There are important issues investors should be aware of before investing in an IEO. As in the case of ICOs, depending on the facts and circumstances of the offering, the offering may involve the offer and sale of securities. This means the IEO may be subject to registration requirements that apply to offerings under the federal securities laws. Among other things, registration means that the company offering the digital asset has to provide important disclosures about itself, its business, the digital asset offered, and the terms of the offering to investors.”
Is the platform a securities exchange?
“In addition, if the IEO involves securities, the online trading platform on which the IEO is being offered may need to register with the SEC separately as a national securities exchange or operate pursuant to an exemption, such as an alternative trading system (ATS). An ATS must be a registered broker-dealer and comply with applicable requirements in order to legally operate in the United States.
The federal laws and regulations governing registered national securities exchanges and ATSs are designed to protect investors and prevent fraudulent and manipulative trading practices. Many online trading platforms may give the misimpression to investors that they are registered or meet the regulatory requirements for a national securities exchange or ATS, and therefore may lack the investor protections that a national securities exchange or an ATS provide to investors.”
The Securities and Exchange Commission is a U.S. based regulatory body, tasked with creating and enforcing laws which pertain to assets deemed securities. The goal of this is to foster the growth of a fair and transparent market for all participants.
Chairman, Jay Clayton, currently oversees operations within the SEC.
In Other News
Beyond simply reiterating their stance on what constitutes a security, and subsequent warnings on potentially violating regulations, the SEC has been hard at work. One example of their other endeavours is a recent proposal put forth, which would see various amendments made to the definition of an ‘accredited investor’.
SEC Charges Opporty for 2018 ICO
This week, the Securities and Exchange Commission (SEC) continued its ICO crackdown. This time, the firm levied charges against project Opporty Founder and Brooklyn-resident Sergii Grybniak. The firm alleges that Grybniak broke the law when his firm raised approximately $600,000 during its 2018 ICO.
News of the charges first broke via Jan. 21 press release. In the release, the SEC reveals the charges laid against Grybniak in detail. Importantly, the primary charge is participating in the unregistered sale of securities. Additionally, the SEC claims that Grybniak made false statements in order to encourage more investor participation.
These statements include a myriad of exaggerated and completely fake claims. In one instance, Opporty claimed that its 2018 ICO was “100% SEC-compliant.” Unfortunately, this claim proved to be the tip of the iceberg. Apparently, Opporty also claimed to have thousands of “verified providers” who were ready to work with the platform.
This claim became so overblown that in one piece of marketing material, Opporty suggested it had a business database that included around 17 million participants. In actuality, the firm had no partnerships. Unfortunately, these claims served one main purpose, to push more investment capital into the ICO.
Major Software Firm
As if the shower of lies put forth weren’t enough, Opporty also made some very specific partnership claims that proved to be bunk as well. According to the SEC, the firm lied about a partnership with a major software company. This lie was to help ease investor doubt about the ability of developers to deliver on their hefty platform promises.
SEC Steps In – Opporty
It doesn’t take much research to see why Opporty ended up in the SEC’s crosshairs. Now, the SEC seeks injunctions against all future digital offerings by the company. On top of the cease-and-desist, regulators require Opporty to return all the funds the company raised during its 2018 ICO. Also, the firm is to face a variety of civil penalties for its actions.
Opporty executives sold the concept to investors as a blockchain-based ecosystem for small businesses. The platform was to provide these small-to-medium sized companies with access to advanced blockchain systems. For example, businesses could list their services and lock in their clients via smart contracts.
United States Investors
Aside from the obvious scamming that took place, Opporty made another key error in its strategy. You see, unlike many similar ICOs, the offering did not explicitly exclude U.S. investors from participating. The 2018 ICO included investments from around 200 US citizens. In this way, the firm invited the SEC to monitor its actions throughout its entire crowdfunding campaign.
An Oppurty Lost
Given the long list of violations this firm now faces, it’s easy to imagine a scenario in which Opporty decides to close its doors. Already, numerous SEC-charged firms have taken similar measures prior to refunding clients’ funds. For now, Opporty has a long legal battle and hefty fines to deal with. You can expect to hear more from this case as the SEC pursues its charges against Grybniak.
Disguises, Fake Identities, and an Illegal ICO – The SEC Looks to Lay Charges
The SEC is hard at work ousting, and holding accountable, those in the world of blockchain that have breached securities laws. Most recently, the SEC has turned their attention to an ICO hosted by a pair of companies operated by a duo of devious individuals.
- CG Blockchain Inc.
- BCT Inc.
This pairing of companies was marketed as developing technology to disrupt hedge funds, and the way they operate.
The Ring Leaders
- Boaz Manor (alias ‘Shaun Macdonald)
- Edith Pardo (alias ‘Edith Mehler’)
In all endeavours, it is believed that Boaz Manor was at the helm, with Edith Pardo acting as a ‘front-woman’, deflecting attention from Manor’s past.
In this particular case, the pair of companies, and the aforementioned individuals, are accused of facilitating/hosting a ‘fraudulent and unregistered offering of digital asset securities’.
$30 million worth of these securities were sold to investors, under the guise of a utility token ‘BCT’. Beyond simply selling illegal securities, those responsible flat out lied to their investors on a variety of fronts.
- Fake Identities
- Fake chain of command
- Product state of development
- Product Adoption
- Investments by founders
The list goes on. Simply put, they were not who they said they were, and the companies did not have a developed product gaining traction within the industry.
This next bit is not an everyday occurrence – rather, it was something you would see in a movie. Knowing full well that their activities were in violation of various securities based laws, Manor and Edith Pardo felt it prudent to hide their identities.
In order to do this, and distance themselves from their past activities (more on that, later), the pair went to great lengths. The SEC states,
“During the scheme, Manor employed a number of deceptive devices related to his fake identity and to the concealment of his background and role.”
Some of the tactics used to conceal their identities included dying hair, growing beards, attaining fake identification under the alias ‘Shaun MacDonald’, etc.
There are few reasons to justify hiding one’s identity in the manner that Manor did – either you’ve done something bad, or are doing something bad. In this particular case, Manor is guilty of both.
We’ve discussed the illegalities associated with his actions in the aforementioned ICO, however Manor has a history of such activity. Dating back to 2005 in Canada, Manor was found to be running a fraudulent hedge fund, valued at nearly $750 million.
When light was shed upon his operation, Manor proceeded to flee the great white north, becoming a fugitive in the process. After eventually returning, and completing a prison sentence of 1 year, Manor went on his way, staying out of the limelight until now.
Due to the great lengths gone to by the pair to partake in the aforementioned illegal activities, in addition to the sum of money raised, the SEC is taking a strong stance. The following is an excerpt from their court filing.
“Unless Defendants are restrained and enjoined, they will again engage in the acts, practices, transactions, and courses of business set forth in this Complaint or in acts, practices, transactions, and courses of business of similar type and object.”
The Securities and Exchange Commission is a United Stated based regulatory body, tasked with creating, an enforcing, regulation surrounding securities. The goal of which is to foster and maintain a fair, transparent, and efficient market for all participants.
Chairman, Jay Clayton, currently oversees company operations.
EMURGO Starts New Blockchain Task Force in Uzbekistan
This week, the blockchain arm of Cardano, EMURGO announced the creation of a special task force to assist the Uzbekistani government with security token integration. The newly developed team’s tasks will include researching, developing, and instituting new security token solutions into the market. Additionally, the team will guide Uzbeki officials on the creation of a regulatory framework to support a shift towards digital assets within the country’s financial sector.
News of the new taskforce first emerged via Cardano’s official blog. In the post, the company announced the creation of its new “strategic blockchain task force.” The post took a moment to describe the overall goals of the group. These goals include the development of a legal framework for STOs and security token trading. As such, the team will need to complete its market research in order to determine the best pathway towards providing solutions for the security token market locally.
Given the remarkable size and importance of the task at hand, it’s no surprise to learn that EMURGO made important strategic partnerships. To date, the firm works with the government of Uzbekistan’s National Agency of Project Management (NAPM), Infinity Blockchain Holdings and the KOBEA group.
KOBEA – Blockchain Education
Notably, the Korean-based blockchain firm, KOBEA will assist EMURGO in the development of an educational structure. The new blockchain-based courses will be available at universities and community centers in the very near future. This structure is necessary to further the local markets’ access to blockchain professionals.
Discussing the importance of the partnerships, the CEO of the EMURGO Group, Ken Kodama took a moment to express the “great honor” his firm feels after receiving the official go-ahead with the project. He also explained why Uzbekistan is one of the best places for blockchain development to occur. Notably, he touched on the government’s willingness to push the adoption of new technology. He even stated that “Uzbekistan is more willing than ever to adopt innovation.”
For its part, EMURGO will provide advisory services to the Uzbek government. Additionally, the firm will look into how to best integrate Cardano’s third generation blockchain into infrastructure projects. Blockchain infrastructure projects are on the rise. Despite the unprecedented growth within the sector over the last year, many analysts still see a lack of infrastructure as the main choke point towards full-scale blockchain adoption.
EMURGO and KOBEA
Interestingly, both EMURGO and KOBEA will provide additional insight into the digital asset banking markets. This data, coupled with a new educational initiative across all major Uzbek universities, should provide the country with a treasure trove of highly-trained professionals.
Cardano continues to impress with its 4th generation blockchain’s capabilities. Now, it appears that the firm has caught the attention of more than just your typical crypto investors. Given the sheer magnitude of its latest project, you can expect to see Cardano remain dominant in the crypto space for years to come.
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