Additional First-Of-Their-Kind Enforcement in the U.S.

September 18

Last week we reported that FINRA brought its first-ever disciplinary action in the cryptocurrency space.  But there were also two other first-of-their-kind enforcement actions last week by the U.S. SEC.

On September 11, the SEC announced its first-ever enforcement action finding an investment company registration violation by a hedge fund manager based on its investments in digital assets.  The SEC entered an Order finding that Crypto Asset Management LP (“CAM”) offered a fund that operated as an unregistered investment company while falsely marketing it as the “first regulated crypto asset fund in the United States.”  According to the SEC’s order, CAM, a California-based hedge fund manager, and its sole principal Timothy Enneking, raised more than $3.6 million over a four-month period in late 2017 while falsely claiming that the fund was regulated by the SEC and had filed a registration statement with the agency.  By engaging in an unregistered non-exempt public offering and investing more than 40 percent of the fund’s assets in digital asset securities, CAM caused the fund to operate as an unregistered investment company.  After being contacted by the SEC staff, CAM ceased its public offering and offered buy backs to affected investors.

Also on September 11, the SEC announced that TokenLot LLC, a self-described “ICO Superstore,” and its owners had settled charges that they acted as unregistered broker-dealers.  This is the SEC’s first case charging unregistered broker-dealers for selling digital tokens after the SEC issued The DAO Report in 2017, in which the SEC first cautioned that those who offer and sell digital securities must comply with the federal securities laws.

According to the SEC’s Order, TokenLot, Lenny Kugel, and Eli L. Lewitt promoted TokenLot’s website as a way to purchase digital tokens during ICOs and also to engage in secondary trading.  Michigan-based TokenLot received orders from more than 6,100 retail investors and handled more than 200 different digital tokens, which the SEC found included securities.  The business’s profits included trading profits and a percentage of the money that TokenLot raised for ICOs.  Their activities required TokenLot, Kugel, and Lewitt to be registered with the SEC as broker-dealers, but they were not.  TokenLot operated from July 2017 through late February, with most of its business occurring after the DAO Report spoke to the issue of the applicability of securities laws to digital assets. According to the Order, in response to the SEC’s investigation, TokenLot voluntarily began winding down and refunding investors’ payments for unfilled orders.  TokenLot, Kugel, and Lewitt also were charged with violating the registration provisions in connection with their conduct.

Without admitting or denying the SEC’s findings, TokenLot, Kugel, and Lewitt consented to the SEC’s order and agreed to pay $471,000 in disgorgement plus $7,929 in interest, and they will retain an independent third party to destroy TokenLot’s remaining inventory of digital assets.

David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. He is currently the Chairman of the Litigation Department of the firm’s New York office. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. Since 2008, David has been included in Chambers for his expertise in international arbitration.