The Securities and Exchange Commission (SEC) is charging two companies for defrauding investors through initial coin offerings (ICOs) — a new method for raising capital with cryptocurrencies.
The SEC says that Maksim Zaslavskiy and his companies have been selling unregistered securities to investors and allege that the digital tokens he offered don’t exist.
Investors in Zaslavskiy’s company’s REcoin Group Foundation and DRC World (also referred to as Diamond Reserve Club) were told that they could expect significant returns on their investments while both companies were not actually in operation, according to the SEC’s complaint.
Zaslavskiy allegedly billed REcoin as "The First Ever Cryptocurrency Backed by Real Estate" and told investors that the company had a “team of lawyers, professionals, brokers and accountants” to facilitate the investments. The SEC alleges that no such professionals were actually hired. With REcoin, Zaslavskiy was able to raise between $2 million and $4 million.
Zaslavskiy is accused of using the same tactics at DRC, a company which he pitched to investors as a diamond investment company. Zaslavskiy and DRC allegedly misled investors and did not purchase any diamonds or conduct in other business operations despite telling investors otherwise.
ICOs are generally conducted by companies too small to do initial public offerings of equity on major stock exchanges like the New York Stock Exchange or NASDAQ. Usually, a company will offer digital coins or tokens, whose price is supposed to roughly rise or fall with the value of the company.
Many experts have warned about ICOs that over-promise or are outright scams but say they’re still optimistic about the potential for legitimate ICOs. Major venture capital investors like Sequoia Capital and Andreessen Horowitz have recently invested in ICOs.
The SEC’s action is one of its first enforcements against an entity using an ICO fundraising method. The regulatory body had issued a warning to investors about ICO scams in August, but has not given any indication that it will crack down on them in the way that South Korea and China recently have.