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Coinbase is being sued by investors for misleading the public

Coinbase is being sued by investors for misleading the public
A securities class action lawsuit was filed against Coinbase Global Inc. alleging violation of the U.S. securities law, including allegations of false misrepresentation to investors before the company went public and in connection with its IPO. The complaint states that Coinbase failed to disclose that it needed a sizable cash injection and its platform was vulnerable to interruptions of service. Due to these facts, the positive declarations about the company’s business were misleading and lacked a reasonable basis.

The IPO took place on April 14, 2021. However, in May 2021 the company announced its plans to raise about $1.25 billion via a convertible bond sale signaling the market about the company’s cash shortage. Subsequently, Coinbase admitted to technical problems “due to network congestion.” Indeed, many Coinbase users experienced a number of issues with their accounts, including inability to trade and withdraw funds when BTC and other cryptocurrencies were rallying. However, all of that was happening before the company’s IPO and was not disclosed to investors.

The announcements made by Coinbase in May 2021 led to a sharp decline in the stock price. The securities class action lawsuit seeks to recover damages on behalf of all Coinbase Global, Inc. investors who purchased common stock between April 14, 2021 and May 19, 2021.



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Crypto lending platform BlockFi is ordered to cease operations

Crypto lending platform BlockFi is ordered to cease operations
The New Jersey’s Acting Attorney General obtained a Summary Cease-and-Desist court order against BlockFi, a crypto lending platform, to halt its Interest Account operations in the U.S. for violation of the securities law of New Jersey.

As alleged by the NJ Acting Attorney General, BlockFi, Inc. through its affiliate BlockFi Lending, LLC has been funding its lending operations at least in part through the sale of unregistered securities to the public. BlockFi offered investors an opportunity to deposit certain eligible cryptocurrencies into their Interest Accounts at BlockFi. The deposited funds were then used by BlockFi for lending and proprietary trading. In exchange, investors were promised a monthly interest.

The Interest Accounts offered by BlockFi constitute securities under the NJ securities law. However, BlockFi failed to register it with the NJ Bureau of Securities or any other securities regulator.

The main challenge for the DeFi projects is the same as for the companies that are selling tokens. Although, there may be no specific or explicit reference to the crypto- and decentralized finance products in the regulations yet, the existing law applies, nonetheless. Especially, when it comes to securities law.



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Coinschedule.com settles a lawsuit filed by the SEC

Coinschedule.com settles a lawsuit filed by the SEC
Blotics Ltd., a UK-based company, which owns coinschedule.com, a once popular website for the upcoming ICOs has been charged by the SEC with violation of the U.S. securities law. During 2016-2019, the website presented a large number of token offerings, which coinschedule.com claimed to be credible and safe for investment based on the “trust score” developed by coinschedule.com. At least some of the advertised tokens were found to be securities.

What was also discovered by the SEC is that coinschedule.com had been accepting payments from the companies for promotion of their ICOs on the website. The U.S. securities law requires those who promote a virtual token or coin that is a security to disclose the nature, scope, and amount of compensation received in exchange for the promotion, which coinschedule.com failed to do.

As a result, the company settled with the SEC and agreed to cease and desist from committing or causing any future violations of the anti-touting provisions of the U.S. securities laws, and to pay $43,000 in disgorgement, plus prejudgment interest, and a penalty of $154,434.



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Another class action lawsuit is filed in connection with the ICO

Another class action lawsuit is filed in connection with the ICO
Another securities class action lawsuit was filed by the private investors against Dfinity group of entities as well as Polychain Capital and Andreessen Horowitz in connection with the sale of Internet Computer Project tokens (“ICP”). The ICP is a native cryptocurrency of the Dfinity Internet Computer Project, which “purports to be a decentralized version of the internet itself. In essence, it is a smart contract platform designed to power blockchain versions of the internet’s most popular applications – decentralized alternatives to WhatsApp, LinkedIn, eBay, TikTok, etc. – which would displace the need to use centralized, gatekeeping hosting services like Amazon Web Services,” according to the complaint.

The complaint also alleges that 469,213,719 ICP “were created out of thin air by Dfinity.” The sale proceeds were used to fund the company's operations. And at least 25% of all ICP were given to Polychain Capital and Andreessen Horowitz, which made them “significant stakeholders of ICP.”

The complaint describes in great detail the efforts made by the entities to promote ICP and further alleges that the ICP tokens qualify as securities under the U.S. securities law. However, the sale of ICP was not registered with the securities regulator in violation of the U.S. securities law. The complaint seeks rescission of the ICP purchases, compensatory damages, interests and other relief.



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SEC obtained a cease-and-desist order against Loci Inc.

SEC obtained a cease-and-desist order against Loci Inc. and its CEO John Wise
The SEC obtained a cease-and-desist order against Loci Inc. and its CEO John Wise for violating the U.S. securities law while selling LOCIcoin in August 2017 – January 2018. LOCIcoin was used as an instrument to raise capital to support the company’s software platform InnVenn, which provided intellectual property search to inventors and other users. During its investigation, the SEC determined that LOCIcoin was a security. Under the U.S. securities law, offering and sale of securities has to be registered with the SEC or qualify for an exemption. This procedure was not followed by Loci Inc., in violation of the registration provisions of the Securities Act of 1933.

In addition, the SEC alleged that Mr. Wise made numerous materially false statements to investors about Loci Inc.’s revenues, number of employees, and Inn Venn’s user base. Moreover, according to the order, Mr. Wise misused close to $40,000 of the invested funds for his personal expenses.

Loci Inc. and Mr. Wise settled the charges with the SEC and agreed to delist and destroy all LOCIcoins. In addition, Loci Inc. agreed to pay a $7.6 million civil penalty, while Mr. Wise agreed to an officer and director bar.



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The receiver is appointed in the case against Coinseed Inc.

The receiver is appointed in the case against Coinseed Inc.
The New York Attorney General Office continues its litigation against Coinseed, Inc., a cryptocurrency trading platform operating out of New York and its two top executives Delgerdalai Davaasambuu and Sukhbat Lkhagvadorj. In June, the Office of Attorney General obtained a court order continuing a mandated pause of the Coinseed Inc. operations and putting a receiver to oversee and protect the investors’ funds.

The newly appointed receiver Michelle Gitlitz, the global head of Crowell & Moring LLP’s Blockchain and Digital Assets practice, will have special powers granted by the court to safeguard the investors’ funds and oversee all assets traded through Coinseed. In addition, the temporary restraining order previously secured by the Attorney General continues to block Coinseed Inc. and its CEO from making unauthorized trades while the lawsuit proceeds.



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Ripple Lab secures a small but important win for its case

Ripple Lab secures a small but important win for its case
One of the very important decisions had been made in the case of SEC v. Ripple Lab. As part of the ongoing litigation, the agency sought to introduce to evidence the past communication between Ripple Lab and its attorney to prove that the company knew that its token sale could be considered an unregistered securities offering in violation of the U.S. securities law.

Earlier, the SEC filed a Motion asking to strip the attorney-client privilege from certain communication between Ripple Lab and its attorneys and compel the company to produce memos discussing the sale of XRP token with the company’s attorneys. The Judge denied this Motion based on the rationale that the privilege “encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.”

Although the Ripple Lab’s battle with the SEC is far from being over, this is a very important interim decision for the case and the industry overall, showing that the communication between clients and their lawyers is protected and cannot be used against clients.



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SEC brings charges against BitConnect and five promoters

SEC brings charges against BitConnect and five promoters
While everyone’s eyes are on the Ripple’s case, the SEC continues to enforce the U.S. securities law and bring charges against individuals and companies, who violate such law. In May, the SEC filed a complaint with the U.S. District Court Southern District of New York against BitConnect and five promoters for conducting an unregistered offering and sale of securities.

According to the complaint, Trevor Brown, Craig Grant, Joshua Jeppesen, Ryan Maasen, and Michael Noble acted as promoters and together with BitConnect raised approximately 2 billion dollars from investments into the BitConnect “lending program.” In exchange, the promoters received a percentage of the invested funds each of them raised. At the same time, none of these promoters were registered with the SEC by broker-dealers in violation of the U.S. securities law.

BitConnect promised investors as high as 40% monthly return from the company’s Bitcoin trading operations. In addition, BitConnect offered referral commissions to existing investors who referred new investors to the lending program. The referral commissions ranged between 0.2% and 7% depending on the referrer’s level. Many may remember a very aggressive marketing campaign of BitConnect filled with a large number of testimonials from investors with referral links to the BitConnect lending program.

For their promotional efforts, five promoters listed in the SEC’s complaint together received over 5.5 million dollars. The SEC's complaint charges the promoter defendants with violating the registration provisions of the federal securities laws, and Jeppesen with aiding and abetting BitConnect's unregistered offer and sale of securities. The complaint seeks injunctive relief, disgorgement plus interest, and civil penalties.



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FBI reports an increase of email crimes involving crypto

FBI reports an increase of email crimes involving crypto
In April, the FBI issued an interesting report about the rise in the use of cryptocurrency in business email compromise schemes. Although the scams involving compromised emails had been around for decades, the use of cryptocurrency in such scams became a rapidly increasing trend in recent years.

The scammers operate in a similar manner to the wire transfers frauds when business or personal email accounts get compromised through social engineering or computer intrusion with the request to transfer funds to the scammers’ bank account. But with the growing acceptance and wider use of cryptocurrencies in business and personal transactions, the scammers direct the victims to transfer crypto funds to the scammers’ wallets.

It is understandable why these crimes become more and more common. Although most crypto transactions can be traced on blockchain, there is no mechanism to identify the owner of the wallet. Crypto transactions are much faster than the bank wires and they cannot be reversed. Being a more efficient alternative to the bank transactions, unfortunately, crypto transfers are also used by criminals in all kinds of scams, including the email related.

According to the FBI report, the mentioning of cryptocurrencies in the business email compromise complaints was minimal before 2018 but since then the numbers more than doubled every year. Just last year alone there were 20 crimes reported with an average monetary loss exceeding 10 million dollars. It is anticipated that this number will continue to rise, therefore, the FBI warns people to be extra cautious when receiving requests for crypto funds transfers over an email.

If you received a suspicious email or became a victim of the email fraud, you can file an online complaint with the FBI's Internet Crime Complaint Center IC3 at www.ic3.gov.



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Canada officially approved bitcoin exchange-traded funds (ETF)

Canada officially approved bitcoin exchange-traded funds (ETF)
Over the last few days, the Ontario Securities Commission (OSC) approved not just one but two bitcoin ETFs. First was the Purpose Investment’s ETF followed by Evolve’s ETF. Both to trade on the Toronto Stock Exchange.

ETF investment model allows investors to receive income from the bitcoin’s increase in value without directly owning any crypto. This should attract more investors into the crypto market making the investment process more familiar and eliminating the risks of operating a crypto wallet. But it does not eliminate the volatility risks associated with the BTC and other cryptocurrencies. Therefore, investment into the bitcoin ETFs is considered “high risk.”

Canada joined Europe on the list of jurisdictions, which now allow such ETFs. The United States is not on this list yet. Although several companies filed with the SEC over the past few years, there have been no approvals issued to this date. Considering certain similarities between the U.S. and Canadian security market’ regulations, the OSC’s decision gives hope that the SEC may finally approve a bitcoin ETF in the near future.



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