The United States Securities and Exchange Commission (SEC) recently filed charges to halt an initial coin offering (ICO), which is the first case brought by the SEC's newly formed Cyber Unit. According to the SEC, defendants Dominic Lacroix, Sabrina Paradis-Royer, and their company, PlexCorps, violated securities laws through the fraudulent and unregistered offering of securities called "Plexcoin." To stop the further misappropriation of investor funds, the SEC successfully obtained an emergency court order to freeze the assets of PlexCorps, Lacroix, and Paradis-Royer,1 effectively halting the Plexcoin ICO.
Described by the SEC as "recidivist securities law violators,"2 defendant Lacroix and his partner, Paradis-Royer, had previously been charged, been enjoined, and/or pleaded guilty in various Canadian court proceedings. In its complaint, the SEC alleged that PlexCorps raised approximately $15 million from thousands of investors throughout the United States. The SEC further alleged that the defendants misled investors by falsely claiming that investments in PlexCoin would yield a "1,354% profit in less than 29 days."3 In that regard, Investors in the PlexCoin ICO were promised returns from:
- the appreciation in value of the PlexCoin Token through investments PlexCorps would make with the proceeds of the PlexCoin ICO and based on the managerial efforts of PlexCorps' team of supposed experts;
- the distribution to investors of profits from the PlexCorps enterprise; and
- the appreciation in value of the PlexCoin Tokens based on efforts of PlexCorps' "market maintenance" team, which included listing the token on digital asset exchanges.4
However, the SEC's allegations tell a different story. In short, the SEC alleged that defendants continued to market PlexCoin Tokens to investors despite a Quebec tribunal's injunctions, that defendants made materially false and misleading statements and omissions with respect to the PlexCoin ICO, that defendants fraudulently attempted to conceal Lacroix's Plexcoin involvement, and that the defendants obtained and misappropriated investor funds. Moreover, Lacroix and Paradis-Royer are alleged to have used these misappropriated funds to finance, in part, personal expenditures, such as "home improvement expenses…lawn services, painting services and electricians."5
The complaint specifically alleges violations of (i) Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, (ii) Section 17(a) of the Securities Act of 1933 (the "Securities Act"), (iii) Sections 5(a) and 5(c) of the Securities Act, and (iv) various acts of aiding and abetting of PlexCorps' violations of such securities laws. The relief sought by the SEC includes preliminary and permanent injunctions, a freeze of defendants' assets, disgorgement plus interest, and penalties. The SEC also seeks to prohibit Lacroix from acting as an officer or director of any public company, and to prohibit Lacroix and Paradis-Royer from offering digital securities.
ICOs or "Token Sales" typically involve the offer and sale of digital assets utilizing distributed ledger or blockchain technology. Last July, the SEC issued an Investigative Report on the application of the federal securities laws to the Decentralized Autonomous Organization (DAO) and the blockchain tokens it offered and sold ("DAO Tokens").6 The SEC determined that the DAO Tokens were securities and therefore were subject to the federal securities laws requiring registration with the SEC. However, the SEC declined to bring an enforcement action in that case.7
This most recent action against PlexCorps is a further example of the SEC's focus on ICOs and the promotion of digital currencies. If true, the facts of this case are particularly egregious. However, it reinforces the reality that merely fashioning the offer and sale of digital assets or tokens as "cryptocurrencies" will not shield the sponsor from regulatory scrutiny, and, in fact, careful analysis of such offerings is warranted to avoid regulatory sanctions, penalties, or worse.
[1] SEC Emergency Action Halts ICO Scam, press release, December 4, 2017.
[2] Securities and Exchange Commission v. PlexCorps (a/k/a and d/b/a Plexcoin and SidePay.CA), Dominic Lacroix, and Sabrina Paradis-Royer, complaint, United States District Court for the Eastern District of New York, CV 17-7007 at 1.
[3] Id. at 2.
[4] Id.
[5] Id. at 25.
[6] Statement by the Divisions of Corporation Finance and Enforcement of the Report of Investigation of the DAO, July 25, 2017.
[7] For more details regarding the SEC's report, see the August edition of the Fund Forum.