The U.S. federal Court for the Eastern District of New York has given federal prosecutors a green light to indict a businessman charged with violations of securities law in making materially false and fraudulent misrepresentations in connection with two virtual currency investment schemes and their related Initial Coin Offerings (ICOs).
Prosecutors charged the businessman with fraudulently inducing investors to purchase purported cryptocurrency "tokens" or "coins" in connection with ICOs of two of his companies. He allegedly did so by promising that the coins were uniquely valuable in that they were backed by real estate investments and diamonds; that they are traded in an easily accessible financial platform with some of the highest potential returns; and that they are led by an experienced team of brokers, lawyers, and developers. Yet the indicted businessman never purchased any real estate or diamonds to back the coins, never hired any of the promised professionals and in fact never issued any virtual coins to his victim investors.
The defendant moved to dismiss the indictment, arguing that virtual currencies are not securities within the meaning of the Securities Exchange Act of 1934, and therefore do not fall within the government's enforcement power. The court disagreed, finding that the businessman’s ICO scheme would fall within the long-established United States Supreme Court ruling from 1946 on what constitutes regulated securities: a “contract, transaction, or scheme whereby a person  invests his money  in a common enterprise and  is led to expect profits solely from the effort of the promoter or third party.” The fact that the defendant labeled the scheme an “ICO” was determined to be inconsequential.
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