SEC Files Charges in Oil Drilling Investment Scheme

The Securities and Exchange Commission today charged two Tennessee men and an accomplice in Fort Lauderdale with allegedly defrauding investors they lured by false promises of high returns from an oil drilling investment opportunity.

According to the SEC’s complaint filed in federal court in Savannah, Georgia, David R. Greenlee and David A. Stewart Jr. orchestrated the $15 million scheme by recruiting and controlling a network of salesmen who offered and sold investors a stake in various companies purportedly using enhanced oil recovery techniques like fracking to extract and sell oil from wells in Kansas, Oklahoma, and Texas.  Investors were allegedly promised profits of 15 to 55 percent per year for decades. 

The SEC alleges that Greenlee and Stewart weren’t registered to sell investments and used fake names like “Dave Johnson” when speaking to investors in order to hide their past criminal records, and they diverted nearly two-thirds of the money raised from investors to pay themselves and their salesmen as well as advertise for new investors.  According to the SEC’s complaint, minimal funds were used for oil production at just a few of the wells in order to create the appearance of oil production and dupe investors who wanted to see activity in-person.

The SEC’s complaint further alleges that Richard “Ric” P. Underwood helped Greenlee and Stewart draft false offering brochures, and he oversaw a boiler room sales team of telemarketers in Florida as they solicited investors nationwide.

“As alleged in our complaint, misleading brochures and radio advertisements lured investors into believing they could strike it rich by investing in these oil drilling opportunities.  Unbeknownst to the investors, most of their money was being used for other purposes,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office. 

The SEC has previously alerted investors about the risks and possible fraudulent activity involved in private offerings of securities for oil-and-gas ventures.  The SEC also encourages investors to check the backgrounds of people selling investments by using the SEC’s investor.gov website to quickly identify whether they are registered professionals and confirm their identity.

In a parallel action, the U.S. Attorney’s Office for the Southern District of Georgia today announced criminal charges against Greenlee, Stewart, and Underwood.

The SEC’s complaint charges Greenlee, Stewart, and Underwood with violations of the antifraud provisions of the federal securities laws.  The SEC seeks the disgorgement of ill-gotten gains plus interest and penalties as well as injunctions.

The SEC’s continuing investigation has been conducted by Brian M. Basinger with assistance from Lauren B. Poper, and the case is being supervised by Aaron W. Lipson and Stephen E. Donahue.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Georgia and the U.S. Secret Service.

SEC Files Charges in Oil Drilling Investment Scheme

The Securities and Exchange Commission today charged two Tennessee men and an accomplice in Fort Lauderdale with allegedly defrauding investors they lured by false promises of high returns from an oil drilling investment opportunity.

According to the SEC’s complaint filed in federal court in Savannah, Georgia, David R. Greenlee and David A. Stewart Jr. orchestrated the $15 million scheme by recruiting and controlling a network of salesmen who offered and sold investors a stake in various companies purportedly using enhanced oil recovery techniques like fracking to extract and sell oil from wells in Kansas, Oklahoma, and Texas.  Investors were allegedly promised profits of 15 to 55 percent per year for decades. 

The SEC alleges that Greenlee and Stewart weren’t registered to sell investments and used fake names like “Dave Johnson” when speaking to investors in order to hide their past criminal records, and they diverted nearly two-thirds of the money raised from investors to pay themselves and their salesmen as well as advertise for new investors.  According to the SEC’s complaint, minimal funds were used for oil production at just a few of the wells in order to create the appearance of oil production and dupe investors who wanted to see activity in-person.

The SEC’s complaint further alleges that Richard “Ric” P. Underwood helped Greenlee and Stewart draft false offering brochures, and he oversaw a boiler room sales team of telemarketers in Florida as they solicited investors nationwide.

“As alleged in our complaint, misleading brochures and radio advertisements lured investors into believing they could strike it rich by investing in these oil drilling opportunities.  Unbeknownst to the investors, most of their money was being used for other purposes,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office. 

The SEC has previously alerted investors about the risks and possible fraudulent activity involved in private offerings of securities for oil-and-gas ventures.  The SEC also encourages investors to check the backgrounds of people selling investments by using the SEC’s investor.gov website to quickly identify whether they are registered professionals and confirm their identity.

In a parallel action, the U.S. Attorney’s Office for the Southern District of Georgia today announced criminal charges against Greenlee, Stewart, and Underwood.

The SEC’s complaint charges Greenlee, Stewart, and Underwood with violations of the antifraud provisions of the federal securities laws.  The SEC seeks the disgorgement of ill-gotten gains plus interest and penalties as well as injunctions.

The SEC’s continuing investigation has been conducted by Brian M. Basinger with assistance from Lauren B. Poper, and the case is being supervised by Aaron W. Lipson and Stephen E. Donahue.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Georgia and the U.S. Secret Service.

SEC Staff Publishes Report on Access to Capital and Market Liquidity

The SEC Division of Economic and Risk Analysis (DERA) today published a report describing trends in primary securities issuance and secondary market liquidity, and assessing how those trends relate to post-crisis regulatory reforms. The report was requested by Congress as part of the FY2016 appropriations process.

The report includes a survey and analysis of recent academic literature, as well as original analyses drawn from publicly available databases and non-public regulatory filings. The report examines the issuance of debt, equity, and asset-backed securities, as well as activity and liquidity in U.S. Treasuries, corporate bonds, single-name credit default swaps, and bond funds. Specifically, the report identifies trends for unregistered offerings, such as those under Regulation D and Regulation Crowdfunding, as well as fixed income transactions, fixed income quotations, and broker-dealer financial positions.

“The health of our primary and secondary markets is critical, and it is important for the SEC, as a key regulator of these markets, to engage in data-driven analysis of market trends and the range of issues that may be influencing those trends. This report both provides a current view of these topics, based on available data, as well as highlighting areas where future analysis could be warranted,” said DERA Acting Director Scott Bauguess.

For more information about the study, and its findings, analyses and conclusions, follow DERA on Twitter, @SEC_DERA.

Investment Management Director David W. Grim to Leave SEC

The Securities and Exchange Commission today announced that David W. Grim, Director of the Division of Investment Management, will leave the agency next month after more than 20 years of public service. 

Mr. Grim, who joined the Division directly from law school and rose to become its leader, has left a legacy of regulatory policy reforms and legal guidance that have shaped the Division and the industry it regulates. He has also dedicated himself to developing the culture of collaboration and professional development that contributed to the Division ranking among the top places to work in the federal government. The Division oversees the $70 trillion dollar asset management industry, which includes mutual funds; exchange-traded funds; closed-end funds; variable insurance products; business development companies and investment advisers. 

“For over two decades, Dave has vigorously pursued the SEC’s mission. He has promoted and protected the interests of investors,” said Chairman Jay Clayton. “America’s investors have been well-served by Dave’s dedication, commitment and expertise.”

As Director, Mr. Grim led the Division’s policy-development; legal-interpretation; data-analysis and disclosure-review functions. Key initiatives advanced under Mr. Grim’s leadership as Director included:

• Commission adoption of a modernized, comprehensive data-reporting regime for investment companies to improve the access and quality of information available to the Commission and the public about fund investments;
• Commission adoption of rules to enhance liquidity risk management by mutual funds so that funds stand ready to meet investor redemptions while also minimizing the impact of those redemptions on remaining shareholders;
• Issuance of guidance providing important and timely transparency of staff views on issues including cybersecurity and robo-advisers; 
• Issuance of an interpretation permitting “clean shares,” to further enable the sale of mutual funds at a transparent price subject to market competition;
• Orderly implementation of money market fund reforms to protect against risks from potential investor runs;
• Improved integration of data-analysis to better inform policy-development, disclosure-review, and industry oversight related to funds and advisers;
• Enhanced public disclosure of aggregated data regarding private fund advisers to improve public understanding of those advisers and the funds they manage;   
• Commission proposal of rules regarding funds’ use of derivatives; electronic delivery of fund shareholder reports; and business continuity and transition plans for investment advisers.

“From the moment I set foot here, I knew the SEC was a special place because of its mission and its exemplary workforce with an unwavering commitment to doing what is right for investors,” Mr. Grim said. “I have been a proud member of the staff of the Division of Investment Management for 22 years, and it has been a privilege to serve the investing public as the Division’s Director.”

Mr. Grim joined the SEC in 1995 as a Staff Attorney in the Division’s Office of Investment Company Regulation. In 1998, he moved to the Division’s Office of Chief Counsel, where he served in a number of positions, including being named Assistant Chief Counsel in 2007. Mr. Grim was appointed as Deputy Director of the Division in 2013, and Director in 2015.

Mr. Grim graduated cum laude with a degree in political science from Duke University and received his law degree from George Washington University, where he was Managing Editor of the George Washington Journal of International Law and Economics. 

Donna Esau Named Associate Regional Director for Examinations in Atlanta Regional Office

The Securities and Exchange Commission today announced the promotion of Donna Esau to Associate Regional Director for Examinations in the agency’s Atlanta Regional Office.

Ms. Esau will direct a staff of approximately 40 accountants, examiners, and attorneys responsible for the examination of broker-dealers, investment companies, investment advisers, and transfer agents across five southeastern states (Alabama, Georgia, North Carolina, South Carolina, and Tennessee). She will assume her new post Aug. 6.

“Donna is a very strong and experienced leader and manager. She has excellent technical skills, and understands the firms and capital markets which we regulate. Donna also understands the risks faced by retail investors in our region,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office. “I am really pleased that Donna will be part of the Atlanta office’s senior management team.”

Ms. Esau added, “I am grateful for this opportunity, and I look forward to leading the examination team in Atlanta as we continue to serve the public, protect investors, and help ensure market integrity. I am also excited about continuing to work with the experienced team of professionals in Atlanta.”

Ms. Esau began her career at the SEC as an examiner in the Atlanta office’s examination program in 1996. She has served as a senior program adviser in the National Examination Program and most recently as Acting Associate Regional Director in the Atlanta office. In 2009, she joined the SEC’s Fort Worth Regional Office as an Assistant Regional Director, and in 2011 returned to the Atlanta Regional Office as an Assistant Regional Director.

Ms. Esau holds a Bachelor of Science in business from the University of North Carolina at Pembroke, a master’s degree in accounting from Kennesaw State University, and is a certified public accountant in the state of Georgia.

Overseas Stock Manipulator Settles SEC Charges

The Securities and Exchange Commission today announced that an overseas stock manipulator has agreed to pay nearly $800,000 and be permanently barred from involvement in penny stocks after hiding his significant stake in a small oil & gas company while secretly funding a fraudulent promotional campaign that artificially boosted the company’s stock price before he dumped his shares.

SEC enforcement investigators uncovered the fraud by peeling back layer upon layer of shell companies and nominee owners to reveal that Joe Yiu Cheung controlled United American Petroleum Corp. (UAPC).  According to the SEC’s order, Cheung utilized an elaborate network of overseas bank and brokerage accounts mostly in bank secrecy jurisdictions to conceal his UAPC ownership.  In addition, he did not file required reports that would have publicly disclosed his burgeoning ownership of UAPC stock.  Cheung paid for the issuance of promotional materials to 2.2 million U.S. residents, inducing investors with rosy falsehoods about UAPC’s operations and prospects.  The SEC’s order finds that while UAPC’s stock price was rising as more investors bought in, Cheung secretly ordered his foreign brokers to dump his shares.  He did not file required reports that would have revealed his sizeable sales to investors, including those purchasing the stock.

“Investors are often attracted to microcap companies and we are committed to protecting them from overseas manipulators and cross-border schemes.  In this case, we worked with numerous foreign authorities to get the evidence we needed to expose Cheung as the man behind false promotional materials and hidden stock transactions,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s order finds that Cheung, who lives in Canada and Hong Kong and also goes by Dylon de lu Zhang, violated Sections 17(a)(1) and (3) of the Securities Act of 1933, Sections 10(b), 13(d),  and 16(a) of the Securities Exchange Act of 1934, and Rules 10b-5(a) and (c), 13d-1, 13d-2, 16a-2, and 16a-3.  Without admitting or denying the findings in the SEC’s order, Cheung has agreed to cease and desist from further violations and must pay $542,498.33 in disgorgement plus $94,131.66 in interest and a $150,000 penalty.  He agreed to a penny stock bar and a 10-year officer-and-director bar.

The SEC’s investigation was conducted by Tracy Sivitz of the Microcap Fraud Task Force and Douglas Smith, David Stoelting, and Sandeep Satwalekar.  The case was supervised by Lara Shalov Mehraban.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority, Swiss Financial Market Supervisory Authority, Hong Kong Securities and Futures Commission, Liechtenstein Financial Market Authority, Guernsey Financial Services Commission, British Columbia Securities Commission, Québec Autorité des Marchés Financier, Ontario Securities Commission, Turks and Caicos Islands Financial Services Commission, and Cayman Islands Monetary Authority.

SEC Files Charges to Stop Fraudulent Misuse of Cancer-Fighting Investments to Fund Restaurant Businesses

The Securities and Exchange Commission today filed charges to stop an alleged ongoing fraud by a Massachusetts businessman misusing investments intended for the development of cancer diagnostic tests to instead pay personal expenses and fund his fiancée’s restaurant businesses. 

According to the SEC’s complaint, Patrick Muraca established two pharmaceutical development companies and raised nearly $1.2 million by representing to investors that their money would be used to develop products to detect cancer and other diseases.  The SEC has traced the flow of investor funds into Muraca’s personal bank account and alleges that at least $400,000 has been used to pay rent for the restaurants and fund other purchases by Muraca, including payments to a casino, automotive shop, and cigar shop. 

The SEC alleges that investors were never informed of the alternative uses of their investments in NanoMolecularDX LLC and MetaboRX LLC, including the fact that Muraca characterized the general character of the businesses as “Serving Food; Restaurant” in separate documents he has filed with the Commonwealth of Massachusetts to do business in the state.

The SEC today obtained a court order freezing the assets of Muraca and his companies.

“As alleged in our complaint, we’re intervening to protect investors because Muraca has veered from his stated intentions and has been using their money for purposes other than the fight against cancer and other diseases,” said Paul Levenson, Director of the SEC’s Boston Regional Office. 

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Muraca.

The SEC’s complaint charges Muraca, NanoMolecularDX, and MetaboRX with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.  The complaint seeks disgorgement of ill-gotten monetary gains plus interest and penalties.

The SEC’s case is being handled by Emily Holness, Rebecca Israel, Mark Albers, Marty Healey, and Amy Gwiazda of the SEC’s Boston office.  The SEC appreciates the assistance of the FBI and the U.S. Attorney’s Office for the Southern District of New York. 

SEC Files Fraud Charges Against Former Brokers Targeting Federal Retirees

The Securities and Exchange Commission today charged four former Atlanta-area brokers with fraudulently inducing federal employees to roll over holdings from their federal Thrift Savings Plan (TSP) retirement accounts into higher-fee, variable annuity products. 

The SEC’s enforcement action comes at a time when the agency has been focusing more specifically on brokers’ and advisers’ interactions with senior investors, and others investing for retirement, through the ReTIRE initiative of the agency’s national exam program and the work of the Broker-Dealer Task Force in its Enforcement Division.

The SEC’s complaint charges an entity called Federal Employee Benefits Counselors through which the brokers targeted federal employees nearing retirement with sizable funds invested in the TSP.  The complaint alleges that the brokers misled investors concerning significant details about the recommended variable annuity investment, including the associated fees and guaranteed investment returns.  The brokers allegedly fostered the misleading impression that they were in some way affiliated with or approved by the federal government.  In some instances, investors were led to believe that their funds would be invested in a product that was offered, vetted, or specifically selected by the TSP.  According to the SEC’s complaint, the brokers sent investors incomplete or modified transaction forms as well as written materials they devised that obscured that the investment was a privately issued variable annuity with no connection to the TSP and would be processed through a private brokerage firm with which the brokers were associated.  The brokers sold approximately 200 variable annuities with a total face value of approximately $40 million to federal employees, who used monies rolled over from their TSP accounts to fund their purchases.  The brokers collectively earned approximately $1.7 million in commissions on these sales.

“As alleged in our complaint, these brokers were motivated by the prospects of higher commissions as they targeted federal employees age 59½ and over and intentionally obscured important details when recommending variable annuity purchases.  They even allegedly excluded the words ‘variable annuity’ from some materials they shared with TSP account holders,” said Aaron W. Lipson, Associate Director of the SEC’s Atlanta Regional Office. 

The SEC today issued an investor alert stressing that the TSP will never contact federal employees asking them to provide sensitive personal information and does not authorize third parties to provide counseling or investment-related services. 

“Be skeptical if someone offers you an investment opportunity and claims to be affiliated with the federal government,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy.

The four former brokers charged in the SEC’s complaint are Christopher S. Laws, Jonathan D. Cooke, Danny S. Hood, and Brandon P. Long.  The complaint charges them and Federal Employee Benefits Counselors with violating and aiding and abetting violations of some or all of the provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Act of 1934, and Rule 10b-5.  The SEC seeks disgorgement of ill-gotten gains plus interest and penalties and permanent injunctions.

The SEC’s Atlanta office conducted the investigation and will lead the litigation.  The Broker-Dealer Task Force is led by Antonia Chion and Andrew M. Calamari.

SEC Announces Whistleblower Award of More Than $1.7 Million

The Securities and Exchange Commission today announced a whistleblower award of more than $1.7 million to a company insider who provided the agency with critical information to help stop a fraud that would have otherwise been difficult to detect.  Millions of dollars were returned to harmed investors as a result of the SEC’s ensuing investigation and enforcement action. 

”When whistleblowers tip the SEC, it not only can bring wrongdoers to justice but also relief to investors,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  ”This whistleblower’s valuable information enabled us to stop further investor harm and ultimately return money to victims.” 

Approximately $158 million has now been awarded to 46 whistleblowers who voluntarily provided the SEC with original and useful information that led to a successful enforcement action.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action.

Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million.  All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards. 

For more information about the whistleblower program and how to report a tip, visit www.sec.gov/whistleblower.

Halliburton Paying $29.2 Million to Settle FCPA Violations

The Securities and Exchange Commission today charged Halliburton Company with violating the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (FCPA) while selecting and making payments to a local company in Angola in the course of winning lucrative oilfield services contracts.

Halliburton, which profited by approximately $14 million from the deals, has agreed to pay more than $29.2 million to settle the SEC’s case.  The company also agreed to obtain an independent compliance consultant to oversee its anti-corruption policies and procedures in Africa.  Halliburton’s former vice president Jeannot Lorenz has agreed to pay a $75,000 penalty for causing the company’s violations, circumventing internal accounting controls, and falsifying books and records.

According to the SEC’s order, officials at Angola’s state oil company Sonangol advised Halliburton management in 2008 that it was required to partner with more local Angolan-owned businesses to satisfy local content regulations for foreign firms operating in Angola.  Halliburton tasked Lorenz to spearhead these efforts.  When a new round of oil company projects came up for bid, Lorenz began a lengthy effort to retain a local Angolan company owned by a former Halliburton employee who was a friend and neighbor of the Sonangol official who would ultimately approve the award of the contracts.  It took three attempts but Halliburton ultimately outsourced more than $13 million worth of business to the local Angolan company.

The SEC’s order finds that Halliburton entered into contracts with the local Angolan company that were intended to meet local content requirements rather than the stated scope of work.  Lorenz violated Halliburton’s internal accounting controls by starting with the local Angolan company and then backing into a list of contract services rather than first determining the services and then selecting an appropriate supplier.  Lorenz also failed to conduct competitive bidding or substantiate the need for a single source of supply, and he avoided an internal accounting control that required contracts of more than $10,000 in countries like Angola with high corruption risks to be reviewed and approved by a special committee within Halliburton.  The company eventually paid $3.705 million to the local Angolan firm, and Sonangol approved the award of seven lucrative subcontracts to Halliburton.

“Halliburton committed to using a particular supplier that posed significant FCPA risks and a company vice president circumvented important internal accounting controls to get the deal done quickly,” said Antonia Chion, Associate Director in the SEC’s Enforcement Division.  “Companies and their executives must comply with these internal accounting controls that help ensure the integrity of corporate transactions.”

Without admitting or denying the findings, Halliburton and Lorenz consented to the order requiring them to cease and desist from committing or causing any violations or any future violations of the books and records and internal accounting controls provisions of the FCPA.  Halliburton agreed to pay $14 million in disgorgement plus $1.2 million in prejudgment interest and a $14 million penalty.  Halliburton must retain an independent compliance consultant for 18 months to review and evaluate its anti-corruption policies and procedures, particularly in regard to local content obligations for business operations in Africa. 

The SEC’s investigation was conducted by Ansu N. Banerjee and Steven A. Susswein with assistance from Alfred Day and Thomas Bednar.  The case was supervised by Melissa R. Hodgman and Ms. Chion.  The SEC appreciates the assistance of the U.S. Department of Justice and the Federal Bureau of Investigation.

Jessica Magee Named Associate Regional Director for Enforcement in Fort Worth Office

The Securities and Exchange Commission today announced that Jessica B. Magee has been named the Associate Regional Director for Enforcement in the SEC’s Fort Worth Regional Office.  Ms. Magee succeeds David L. Peavler, who left the agency in May.

Ms. Magee joined the SEC as a Staff Attorney in the Enforcement Division in 2010, and she became Senior Trial Counsel in 2012.  Ms. Magee was promoted to Assistant Regional Director in 2015, and she became Regional Trial Counsel in 2016.

Ms. Magee has investigated or supervised a number of significant matters within the Enforcement Division, including:

• Several emergency actions in cases ranging from offering and affinity frauds to misconduct by investment advisers.
• Cases involving internal controls violations, improper restrictions on communications with federal regulators, and a Ponzi scheme involving a virtual currency.
• High-profile cases involving professional athletes and other public figures.

“Jessica is a dynamic and charismatic leader,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

Steven Peikin, Co-Director of the SEC’s Enforcement Division, added, “Jessica is greatly respected across the Commission for her vision and judgment and will be an exceptional addition to our senior leadership team in Fort Worth.”

Shamoil T. Shipchandler, Director of the Fort Worth Regional Office, said, “During her tenure, Jessica has successfully resolved some of the most complex and challenging cases in our office.  And with this base of substantive knowledge, Jessica adds a unique vision and leadership style.  We are thrilled to have her lead our talented enforcement staff.”

Ms. Magee said, “I am grateful for the opportunity to serve, and I am excited to lead Fort Worth’s enforcement team.  In our diverse and complex region, we will continue to protect investors while adapting to meet the continuing challenges of technology and sophistication.”

Before joining the SEC staff, Ms. Magee worked as a litigation associate for the law firm of Thompson & Knight in Dallas.  She earned her law degree cum laude from Southern Methodist University’s Dedman School of Law and her Bachelor of Arts degree summa cum laude from Texas State University.  Ms. Magee has received a number of awards for her work, including the SEC’s Ferdinand Pecora Award in 2014 and Arthur F. Mathews Award in 2015.

SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities

The Securities and Exchange Commission issued an investigative report today cautioning market participants that offers and sales of digital assets by “virtual” organizations are subject to the requirements of the federal securities laws. Such offers and sales, conducted by organizations using distributed ledger or blockchain technology, have been referred to, among other things, as “Initial Coin Offerings” or “Token Sales.” Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.

The SEC’s Report of Investigation found that tokens offered and sold by a “virtual” organization known as “The DAO” were securities and therefore subject to the federal securities laws. The Report confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt. The purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors’ protection.

“The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us,” said SEC Chairman Jay Clayton. “We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”

“Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today’s Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws,” said William Hinman, Director of the Division of Corporation Finance.

The SEC’s Report stems from an inquiry that the agency’s Enforcement Division launched into whether The DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for “Ether,” a virtual currency. The DAO has been described as a “crowdfunding contract” but it would not have met the requirements of the Regulation Crowdfunding exemption because, among other things, it was not a broker-dealer or a funding portal registered with the SEC and the Financial Industry Regulatory Authority.

“The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. 

Steven Peikin, Co-Director of the Enforcement Division added, “As the evolution of technology continues to influence how businesses operate and raise capital, market participants must remain cognizant of the application of the federal securities laws.”

In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants:  the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.

The SEC’s Office of Investor Education and Advocacy today issued an investor bulletin educating investors about ICOs. As discussed in the Report, virtual coins or tokens may be securities and subject to the federal securities laws. The federal securities laws provide disclosure requirements and other important protections of which investors should be aware. In addition, the bulletin reminds investors of red flags of investment fraud, and that new technologies may be used to perpetrate investment schemes that may not comply with the federal securities laws.

The SEC’s investigation in this matter was conducted in the New York office by members of the SEC’s Distributed Ledger Technology Working Group (DLTWG) — Pamela Sawhney, Daphna A. Waxman, and Valerie A. Szczepanik, who heads the DLTWG — with assistance from others in the agency’s Divisions of Corporation Finance, Trading and Markets, and Investment Management. The investigation was supervised by Lara Shalov Mehraban.