After the collapse of the ICO-Hype, the great awakening of regulators and investors takes place. It is becoming increasingly clear that most of the ICOs were carried out either negligently or even fraudulently. Nevertheless, investors happily paid many billions of dollars for questionable tokens issued in those ICOs. According to CoinSchedule, between 2016 and 2018 more than $26 billion has been raised through ICOs. With the crashed prices of cryptocurrencies, disappointed investors start to take action against ICO issuers and their people. That’s bad news for the bad actors and may even be bad news for good people who acted in good faith.

Most Tokens Are Securities

Financial market regulators are retrospectively classifying most token as securities and trading in these so-called security tokens as securities trading. Consequently, ICOs are public offerings of securities. The U.S. Securities and Exchange Commission (SEC) has stressed several times in recent weeks that it assumes that most tokens are classified as security tokens. ICOs issuing security tokens without SEC registration are to be deemed illegal. The acting persons are to be held responsible according to the applicable provisions of the securities laws.

Disclosures of Public Companies Have To Be Complete and True

In its statements, the SEC pointed out that ICOs are to be qualified as a form of IPO. In this context, ICO token issuers are to be regarded as public companies within the meaning of securities laws. This, in turn, means that the actions of the responsible managers must be measured against the requirements of these securities laws. This also applies to the so-called ICO promoters and ICO adivisors, who are to be qualified as brokers of securities in this legal context.

A jury verdict that held an ex-CFO liable for misleading investors makes clear that the SEC will take action against incomplete disclosures. On Nov. 20, 2018, a jury in the U.S. District Court in Massachusetts found the CFO of a public company liable for securities fraud. The case was filed by the U.S. SEC’s against the CFO of the US company Aveo Pharmaceuticals. It arose out of Aveo’s 2012 disclosures regarding the Food and Drug Administration (FDA) concerns over a kidney-cancer-fighting drug the company developed back then.

The CFO told investors that the drug was moving toward approval. In fact, the FDA was telling the company it had deep concerns about how the trial had been designed and said the way the company was comparing its product with another medicine on the market was fundamentally flawed. The agency in 2013 rejected an application to approve the medicine.

In March 2016, the SEC filed a lawsuit alleging securities fraud against the company, the CEO, CFO, and chief medical officer. The company agreed to pay a $4 million penalty to settle SEC charges without admitting or denying the allegations in the complaint.

Misleading ICO Communication Is Securities Fraud

The U.S. verdict highlights the obvious importance of making specific, full, and accurate disclosures to investors. More importantly for directors of a public company, it also highlights a vulnerability of relying on professionals and subject-matter experts for protection from SEC liability when they may not have received all of the relevant information. In a statement, the SEC said:

“Today, a federal court jury found that AVEO’s former CFO David Johnston misled investors about the prospects for FDA approval of AVEO’s flagship developmental drug, Tivozanib. The jury’s verdict makes clear that a company and its officers are required to be honest in their public communications, including about matters as critical as communications with regulators about approval of a key product.”

The problem with most ICOs was that they had no product, no organization, and thus no track record. The vast majority of ICOs were based on ideas only. These ideas were then presented to the investors in whitepapers. Most of the time, the involved people exaggerated or even lied. Investors were regularly misled today. On the basis of the last judgment in the US, this misleading of investors with whitepapers and social media postings may fulfill the criteria of securities fraud.

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