Georgetown Law
Technology Review

The recent cryptocurrency phenomenon has proved controversial in many aspects, none more so than the existence of initial coin offerings (ICO). ICOs provide a way for new cryptocurrency companies to raise funds by selling their own cryptocurrency, often in exchange for more popular or established cryptocurrencies, such as Bitcoin or Ethereum.1Justin Jaffe, Initial Coin Offerings, Explained, CNET (Feb. 2, 2018, 10:28 AM), https://www.cnet.com/how-to/initial-coin-offerings-explained/. The ICO process is criticized for providing a fertile ground for scams and fraud.2Alex Kontegna, How Not to Be Scammed by an ICO, BLOCKGEEKS (Feb. 2017), https://blockgeeks.com/how-not-to-be-scammed-by-a-initial-coin-offering/. On January 30, the federal government decided to step into the ICO arena, halting an ongoing ICO for AriseBank’s “AriseCoin” cryptocurrency due to allegations of fraud.3Gertrude Chavez-Dreyfuss & Susan Heavey, U.S. SEC Halts AriseBank’s Initial Coin Offering, Alleges Fraud, REUTERS (Jan. 30, 2018, 9:58 AM), https://www.reuters.com/article/us-usa-cryptocurrency-arisebank/u-s-sec-halts-arisebanks-initial-coin-offering-alleges-fraud-idUSKBN1FJ222.

The U.S. Securities and Exchange Commission (SEC) initiated the action, alleging that AriseBank had “falsely stated that it purchased an FDIC-insured bank” and “allegedly omitted to disclose the criminal background of key executives.”4Id. AriseBank initiated the AriseCoin public sale on December 27, 2017 and would have concluded it on January 27, 2018 without SEC intervention.5Id. The SEC’s approved court order, in addition to halting the ICO, froze AriseBank’s assets and approved the appointment of a receiver for the assets deemed connected to the ICO fraud.6Id. Stephanie Avakian, codirector of the SEC’s enforcement division, said in a statement, “We allege that AriseBank and its principals sought to raise hundreds of millions from investors by misrepresenting the company as a first-of-its-kind decentralized bank offering its own cryptocurrency to be used for a broad range of customer products and services.”7Id.

Part of the SEC’s complaint against AriseBank was that the company used “wide dissemination tactics” to perpetuate the fraudulent money-raising among the public.8Melanie Waddell, SEC Halts ICO Scam Endorsed by Evander Holyfield, THINKADVISOR (Jan. 30, 2018), http://www.thinkadvisor.com/2018/01/30/sec-halts-ico-scam-endorsed-by-evander-holyfield. These tactics included widespread social media outreach through outlets such as Twitter.9Id. Most notably, AriseBank secured an official endorsement from Boxing Hall of Famer Evander Holyfield.10Id. Celebrity endorsements for ICOs are especially controversial, as the SEC has warned against such behavior in the past.11Stan Higgins, SEC: Celebrity ICO Endorsements Could Be Illegal, COINDESK (Nov. 1, 2017), https://www.coindesk.com/sec-celebrity-ico-endorsements-illegal/. On November 1, 2017, the agency issued guidance stating that “[c]elebrities and others are using social media networks to encourage the public to purchase stocks and other investments. These endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.”12Id. Before Holyfield, various celebrities such as Jamie Foxx, William Shatner, Floyd Mayweather Jr., and Paris Hilton had publicly endorsed various ICOs.13Id.

In addition to the fraud connected to the ICO, AriseBank is also accused of failing to disclose the criminal history of executives key to the company. Cofounder Jared Rice, Sr. plead guilty to charges of felony theft and tampering with government records in 2015.14Mark Curriden, SEC Charges Dallas Cryptocurrency Business with Fraud, DALLAS BUS. J. (Jan. 30, 2018 3:52 PM) https://www.bizjournals.com/dallas/news/2018/01/30/sec-charges-dallas-crypto-currency-business-with.html. AriseBank’s president, Kevin Spencer, has multiple arrests and convictions in his past, including a five-year prison sentence for felony robbery that concluded in October 2015.15Id.

AriseBank’s downfall has ripple effects for companies in the cryptocurrency space. Businesses providing services or entering into contracts with cryptocurrency companies need to do due diligence to ensure that the company is legitimate and law-abiding. There is potential for legal liability for firms that, in providing services to an entity such as AriseBank, were negligent in detecting fraud or perhaps even aiding and abetting fraud. Cryptocurrency entities themselves should use this action as an impetus to check their own regulatory compliance. A top-to-bottom review of business practices may help cryptocurrency companies ensure compliance and avoid illegality and enforcement in the future.

The SEC action against AriseCoin is especially important because it is the first time the Commission has sought the appointment of a receiver in connection with fraud tied to an ICO. Previously, the Georgetown Law Technology Review has covered the first SEC civil enforcement action against an ICO.16Guiying Ji, SEC Files First Case for ICO Regulation, GEO. L. TECH. REV. (Oct., 2017), https://georgetownlawtechreview.org/sec-files-first-case-for-ico-regulation/GLTR-10-2017/. The AriseBank action signals the possibility of increased enforcement activity by the agency in this space. The largely unregulated status of ICOs has led to a general sense of lawlessness surrounding the offerings, and the SEC’s actions against AriseBank could be the first step in providing future investors a foundation for legality.