A Dallas-based cryptocurrency payment processing platform, AriseBank (Arise), claimed to be the world's first "decentralized bank" with FDIC insurance, was taken over by the U.S. Securities and Exchange Commission (SEC) through the appointment of a court-appointed receiver. The SEC filed a complaint seeking emergency ancillary relief under seal to ensure that, if granted, Arise's assets would be frozen. The United States District Court for the Northern District of Texas agreed with the SEC's request and granted a temporary restraining order freezing all of Arise and its co-founders' assets, including all digital assets, purported to be worth at least $600 million.
Arise offered and sold a proprietary cryptocurrency, AriseCoin, to the public through a month-long initial coin offering (ICO). As alleged by the SEC, Arise allegedly made false statements over the internet about the company's acquisition of an FDIC-insured bank, its capacity to offer VISA cards, its corporate affiliations, and its regulatory compliance status. The SEC's complaint also states that executive officers of the company, including Arise's two co-founders, had criminal histories (consisting of felony theft, tampering with government records, and felony robbery) that the company failed to disclose to potential investors.
This extraordinary relief, complete through an ex parte proceeding, is the first time the SEC has sought the appointment of a receiver in connection with an alleged ICO scheme. The SEC will now move forward with the litigation, seeking both preliminary and permanent injunctions, and disgorgement of ill-gotten gains, penalties, and a permanent ban against Arise's co-founders from serving as officers or directors of a public company or offering digital securities in the future.
This is the latest, and what appears to be just the beginning, of the SEC's measures and remedies to protect investors from those who engage in fraudulent conduct in the emerging digital securities marketplace. See Spotlight on Initial Coin Offerings and Digital Assets. Just less than two months ago, on December 4, 2017, the SEC's new Cyber Unit filed its first ever lawsuit, and obtained an order for an emergency asset freeze in New York federal court against PlexCorps and its founders, to halt the ICO efforts. The SEC's message is clear: "Attempting to conceal what we allege to be fraudulent securities offerings under the veneer of technological terms like 'ICO' or 'cryptocurrency' will not escape the Commission's oversight or its efforts to protect investors" (Shamoil T. Shipchandler, Director of the SEC's Fort Worth Regional Office).
The SEC's recent, and increasing, extraordinary measures to preserve investor funds should encourage companies contemplating ICO issuances to engage experienced counsel to thoroughly assess the applicability of the securities laws to their potential issuances.