Topic: Criminal Defense
The U.S. Securities and Exchange Commission (SEC) charged boxer Floyd Mayweather and music producer DJ Khaled with illegally promoting investments into Initial Coin Offerings, more commonly known as ICOs. This is the first time the SEC has taken regulatory action against people promoting investments in cryptocurrency. But it’s not likely to be the last. The world of cryptocurrency is growing and evolving at a breakneck pace, and often in ways that pose serious regulatory and legal challenges.
Anyone getting into the cryptocurrency business should exercise caution. The SEC took jurisdiction over a large swath of the cryptocurrency economy by defining many coins as securities. So, in addition to the usual risks associated with investing, cryptocurrency entrepreneurs may also have to ensure that they comply with SEC rules.
If you are under investigation – criminal or regulatory – for conduct related to cryptocurrency or the promotion of cryptocurrency, or if you’ve already been charged, contact a skilled and aggressive NYC criminal defense lawyer from Protass Law PLLC right away. To schedule a free consultation of your case, contact us today at (212) 455-0335.
Cryptocurrencies May Be Considered Securities
The SEC has begun classifying some types of cryptocurrencies as securities, as opposed to mere currencies. The difference between the two is not always clear, but the consequences can be significant, as demonstrated by the recent charges against Mayweather and Khaled. Generally, a cryptocurrency may be classified as a security if, in addition to representing a medium of exchange, unit of account, or store of value, the virtual tokens or coins represent other rights.
Cryptocurrencies are often traded and stored within a decentralized autonomous organization (DAO), which may also be called a decentralized autonomous corporation (DAC). A DAO is represented by financial transaction records and rules encoded into a computer program called a blockchain, which is ultimately controlled by the DAO’s shareholders. It’s a financial organization that exists only in cyberspace.
Although the precise legal nature of this type of organization is unknown, the SEC has decided that any cryptocurrency created or exchanged by a DAO meets the criteria to be defined as a security. The SEC reached this conclusion because the tokens represent more than just monetary value – they represent the rights of shareholders with respect to the DAO. For this reason, any promotion, purchase, or sale of cryptocurrencies issued by a DAO must comply with SEC regulations.
How Did Mayweather and Khaled Violate SEC Rules?
The SEC’s rules require that anyone promoting an investment in a security must disclose that they are being paid to do so if, in fact, they are being paid to do so. So, for example, if a company pays a spokesperson to convince the public to invest in its shares, that spokesperson’s compensation must be disclosed to those who are being sold on the company. Similarly, anyone who advocates for an investment into a cryptocurrency that qualifies as a security must disclose the payments he or she is receiving for doing so.
DJ Khaled received $50,000 from cryptocurrency firm Centra to promote its ICOs. Floyd Mayweather received $100,000 to do so. Both celebrities were named on the Centra website as “brand ambassadors and managing partners.” The SEC subsequently sued Centra for raising $32 million from investors and selling its CTR Tokens, which are securities investments they failed to disclose to the SEC.
Khaled and Mayweather were not implicated in the fraud suit against Centra. Instead, the two were charged with failing to disclose the payments they received from Centra to promote its ICO. Khaled touted Centra’s ICO as a “game changer,” while Mayweather’s tweeted that the ICO “starts in a few hours. Get yours before they sell out, I got mine.” The boxer also told his 7.85 million Twitter followers, “you can call me Floyd Crypto Mayweather from now on.”
What are the Consequences of Violating SEC Rules?
The SEC is a regulatory agency and therefore cannot bring criminal charges against anyone. But it can bring suit in federal court (known as an enforcement action) or initiate an administrative proceeding in its own in-house court system. Either way, the SEC typically seeksfines, disgorgement of ill-gotten gains, restitution, and restrictions on future investments or entrepreneurial activities. Both Khaled and Mayweather settled their cases without admitting to any wrongdoing. According to the terms of the settlement, Mayweather paid the SEC $300,000 in penalties plus $14,775 in interest. As for Khaled, he paid $100,000 in penalties and $2,725 in interest. The men also agreed to stop promoting cryptocurrencies.
Have You Been Accused of Violating an SEC Regulation? Contact Us Today for Help
The lesson to be learned here is to exercise caution when investing in new technologies and currencies. Any violation of investment regulations or criminal statutes may result in protracted litigation that could erase all of your investment gains – not to mention the possibility of jail time and/or significant financial penalties. If you are involved in the cryptocurrency industry, you must ensure that you have experienced legal counsel by your side. To learn more about how to defend against investment fraud, call Protass Law PLLC today at (212) 455-0335, or reach out online to schedule a free consultation of your case.