Investors who had purchased cryptocurrency through an Initial Coin Offering (“ICO”) may have a remedy under Section 12(a) of the Securities Act of 1933 to get their money back with interest. With the overall downward price trend in the virtual currency markets, this potential claim could expose ICO issuers to millions in damages if they have to return investor money, especially if the ICO occurred during a period when Ethereum prices were significantly higher.
On November 16, 2018, the Securities and Exchange Commission (“SEC”) issued cease-and-desist orders against two companies that had conducted ICO in 2017 that were directed to United States citizens and worldwide. The companies, Paragon Coin and AirFox, received the cease-and-desist orders from the SEC, which subjected each company to fines.
The SEC also directed each company to issue notice to all persons who purchased their respective ERC-20 tokens in their ICO of “their potential claims under Section 12(a) of the Securities Act, including the right to sue to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if [the purchaser] no longer owns the security.”
Ethereum, the primary cryptoasset used to facilitate ICOs, was trading above $300 (almost 70% higher than its current November 2018 levels) in the fall of 2017, and during the first-half of 2018, Ethereum traded as high as $1,000. Based on the SEC’s sanction against Paragon Coin and AirFox, it would seem that investors who lost money investing in a bad ICO could file a lawsuit against the ICO issuer to recover the money such investor invested in the ICO.
Issuers and cryptocurrency foundations should seek legal counsel to take protective measures against this litigation risk since the damages could drain the cash reserves of a cryptocurrency project and decimate the ability to achieve the goals of their project. To read the cease-and-desist orders, click here and here.