The Securities and Exchange Commission today has charged both a diamond and a real estate initial coin offering scheme with defrauding investors.
REcoin, which promoted itself as the first cryptocurrency-backed real estate company and DRC World, a diamond company, are owned by businessman Maksim Zaslavskiy. In a statement, the SEC accuses Zaslavskiy of selling unregistered securities and coins that don't exist to unsuspecting investors under these companies.
Zaslavskiy allegedly told these investors they could expect "sizeable returns" from each operation, all the while misstating how their money would be invested and misrepresenting how much had already been invested, according to the SEC.
The U.S. government has since obtained an emergency court order to freeze Zaslavskiy's and his companies' assets.
Though these appear to be the first initial coin offerings, or ICO's, to come under fire for fraud, they certainly won't be the last.
As New York Times columnist Kevin Roose so aptly described the nature of ICO's, "Imagine that a friend is building a casino and asks you to invest. In exchange, you get chips that can be used at the casino’s tables once it’s finished. Now imagine that the value of the chips isn’t fixed, and will instead fluctuate depending on the popularity of the casino, the number of other gamblers and the regulatory environment for casinos. Oh, and instead of a friend, imagine it’s a stranger on the internet who might be using a fake name, who might not actually know how to build a casino, and whom you probably can’t sue for fraud if he steals your money and uses it to buy a Porsche instead. That’s an I.C.O."
Obviously, the SEC can still prosecute for fraudulence. The government agency has also been worried about ICO's, recently warning the public by issuing an investor alert in July, telling potential investors to be wary of unsolicited offers and unbelievable claims such as high returns.
"Investors should be wary of companies touting ICOs as a way to generate outsized returns," SEC spokesperson Andrew M. Calamari followed up in the statement out today. "As alleged in our complaint, Zaslavskiy lured investors with false promises of sizeable returns from novel technology."