On September 29, 2017, the U.S. Securities and Exchange Commission filed a complaint in federal court against REcoin Group Foundation, LLC (“REcoin”); DRC World, Inc., also known as Diamond Reserve Club (“DRC”); and their principal, Maksim Zaslavskiy. The complaint alleges false and misleading statements and violations of securities laws in connection with initial coin offerings (“ICOs”) by the two companies.

According to the SEC, the defendants raised funds from hundreds of investors by offering nonexistent digital “tokens” or “coins” supposedly backed by investments in real estate (in REcoin’s case) and diamonds (in DRC’s case). The SEC further alleges that in order to evade securities laws, including registration requirements, the defendants styled the ICOs as sales in club memberships. The SEC’s complaint also alleges that the defendants made false and misleading statements including that:  defendants had raised as much as $4 million (instead of the $300,000 they actually raised); the underlying assets would be selected by the companies’ “experts” and “team of lawyers, professionals, brokers, and accountants” (when none had been hired or consulted); and DRC investors could expect 10% to 15% returns (when the investments were nonexistent). According to the SEC, the defendants eventually terminated the REcoin ICO by falsely claiming that the U.S. government required them to do so, when the SEC alleges that Mr. Zaslavskiy himself characterized offering the advertised tokens as “impossible.”

In a joint statement on REcoin’s and DRC’s websites, the companies responded:

We believe this action is the result of a lack of legal clarity as to when an ICO or a digital asset is a security. This lack of regulatory clarity was implicitly recognized by the SEC in its recent Report of Investigation of the Distributed Organization (“DAO”). While we disagree with the SEC’s claims that the tokens we sold are securities, and will vigorously defend ourselves, we are cooperating with the SEC in the hope of resolving this issue.

In the mentioned investigative report, the SEC concluded that whether an offer and sale of an interest in a virtual organization constitutes the offer and sale of a security depends on “the facts and circumstances” of the transaction, “regardless of the terminology used.” In July, the SEC Office of Investor Education and Advocacy also published an investor bulletin on the fraud risks posed by ICOs.

The SEC has announced that the U.S. District Court for the Eastern District of New York has granted an emergency order freezing the defendants’ assets.