In the wake of the 2017 cryptocurrency “fever,” the wall street journal shines light on the potential problems to come with cryptocurrency and fraudulent initial coin offerings (ICOs). An ICO is a platform for investors to buy and sell digital assets, such as tokens or coins. During an ICO companies use coin offerings to raise funds by selling their own digital currency, such as bitcoin or ethereum. Under Federal Securities Law, if the digital assets are a “security” then the platform must register as a national securities exchange regulated by the Securities and Exchange Commission (SEC). This protects investors from fraudulent and manipulative trading practices. The SEC also regulates “exchanges.” The cryptocurrency online platform may not register as an “exchange” and therefore it is not regulated by the SEC to protect its investors. On March 7th, 2018, the SEC released a statement acknowledging concern over digital asset trading that may appear as SEC registered and regulated when it is not. The SEC has filed civil charges against companies and individuals involved in the potential fraudulent ICOs.
Since 2017, coin offerings have generated billions of dollars in global revenue. The wall street journal has analyzed 1,450 cryptocurrency offerings and they claim that 271 of the offerings show “plagiarism, identity theft and promises of improbable returns.” Specifically, “potential plagiarized investor documents, promises of guaranteed returns and missing and fake executive teams.” According to the journal, 271 potential fraudulent coin offerings have brought in more than $1 billion dollars from investors. Some of these firms are still raising funds while others have shut down.
Generally, ICOs use “whitepapers” to entice investors. Whitepapers describe the members of the company, provide details on the project to be developed and seek public assistance in its project by offering its tokens in exchange for cryptocurrencies. The company may also set up a website with pictures of the members and team biographies. Unfortunately, the journal discovered whitepapers that had copied other whitepapers word-for-word. The copied language included “descriptions of marketing plans, security issues and even distinct technical features such as how other programmers can interact with their database.” Many of the crypto companies did not list a single employee and some listed team members that do not even exist or used false identification (identity theft). Some companies even promised investors risk free returns, which is not permitted under the regulations of the SEC.
Florida Causes of Action
As “reality” is setting in for investors around the U.S., the available causes of action for crypto investors is of high importance. Many class action suits have already been filed against cryptocurrency companies including Florida. Under Florida law, a plaintiff may claim intentional misrepresentation and/or common law fraud. Generally, a party commits fraud when he or she makes false statements and misrepresentations to trick and induce another party and knows or should have reason to know the statements to be false.
A crypto investor may claim fraud based on the false statements used by the company to induce an investor to purchase the company’s cryptocurrency. Basically, the investor may claim he or she was taken advantage of by the members of the ICO and the lack of regulatory oversight. The “whitepaper” may be Exhibit A to a fraud claim against these companies. In February 2018, the third class action suit was filed in Florida against the cryptocurrency platform “BitConnect” for fraudulently misrepresenting itself as a regulated financial system and for falsifying future returns and guarantees. Similarly, a Fraud in the Inducement claim can be made based on the false statements (misrepresentations) used to execute a contract between the investors and the crypto company.
Florida’s “Deceptive and Unfair Trade Practices Act” (FDUTPA) protects consumers against companies that engage in unfair or deceptive acts or practices aimed at Florida trade and commerce. Under FDUTPA, an investor may allege that these cryptocurrency companies violated the act based on intentional misrepresentations to mislead or deceive its investors (consumers) into believing the whitepapers to be true.
The “Florida Securities and Investor Protection Act,” protects the public against fraudulent and deceptive practices regarding the sale of securities. Fla. Stat. §§517.011 makes it illegal to falsely represent and sell unregistered securities. Under this act, an investor may claim that had he or she known the truth they would not have invested in the cryptocurrency and lost their money.
An investor may assert civil theft if the defendant acted with “felonious intent.” Florida courts have ruled that a defendant who makes willful false representations with the intent to deprive the plaintiff of their property in a stock transaction may be guilty of civil theft. If successful, the investor may recover treble damages and attorney fees, however a civil theft claim is difficult to prove and requires clear and convincing evidence.
If you have any further questions in regards to cryptocurrency and the legal aspects associated, our team is here to help. We can easily be reached at any of the following: info@epgdlaw.com OR (786) 837-6787.
*Disclaimer: This blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*
