On May 28, 2021, the SEC filed a complaint against five individuals in connection with an alleged unregistered digital asset securities offering for BitConnect, an unincorporated entity with ties to the UK and India (see BitConnect Action).

Update: On September 1, 2021:

On June 22, 2021, in an unrelated action, the SEC settled charges against Loci Inc., a Delaware corporation based in Reston, Virginia, and its CEO John Wise for making materially false and misleading statements in connection with an unregistered offer and sale of digital asset securities (see Loci Settlement Order).

On May 28, 2021, the SEC filed a complaint against five individuals (BitConnect promoters) in the United States District Court for the Southern District of New York (SDNY), alleging that from approximately January 2017 to January 2018, BitConnect used a network of promoters, including BitConnect promoters, to market and sell securities in a "lending program" run and managed by BitConnect (BitConnect lending program).

The SEC complaint charges the promoters with:

According to the SEC complaint, the promoters received commissions based on their success in soliciting investor funds. The SEC complaint seeks injunctive relief, disgorgement plus interest, and civil penalties.

The SEC complaint provides a detailed summary of the history of BitConnect and its promotional activities related to the BitConnect lending program. According to the SEC complaint, BitConnect was founded in 2016 as a provider of BitConnect Coin (BCC), a type of cryptocurrency created by the BitConnect founder.

From early 2017 to early 2018, defendants raised over $2 billion through the BitConnect lending program that sold and traded BCC. SEC alleges the BitConnect lending program maintained a BitConnect referral program that awarded commissions to promoters, hosted promotional events, and conducted public advertising through social media and other outreach events. According to the SEC, no registration statement has ever been filed with the SEC in connection with offers or sales of the BitConnect lending program investments.

As noted in the SEC complaint, in January 2018, both the Texas State Securities Board and North Carolina Secretary of State Securities Division each issued separate cease-and-desist orders to BitConnect. Later that month, BitConnect closed the BitConnect lending program. Shortly after closing the BitConnect lending program, BCC lost 92% of its value and eventually investors lost "all or nearly all" of their investments in BitConnect.

Update: According to an August 19, 2021 SEC release (SEC Release No. 25177, ), on August 13, 2021, the SDNY entered a final judgment against two of the five BitConnect promoters, settling charges against Michael Noble (a.k.a. Michael Crypto) and Joshua Jeppesen as defendants for their involvement with BitConnect and the promotion of its lending program. The SDNY also entered a final judgment against Laura Mascola as a relief defendant. Under these judgments, Jeppesen and Mascola have been ordered to collectively pay more than $3.5 million and 190 bitcoins in disgorgement and prejudgment interest and Noble will be ordered to pay disgorgement, prejudgment interest and a civil penalty in an amount to be determined by the SDNY at a later date upon the SEC's motion.

On June 22, 2021, the SEC announced it had entered an order (Loci order) settling charges against Loci Inc. and its CEO John Wise (collectively, Loci respondents) in connection with cease-and-desist proceedings instituted by the SEC against the Loci respondents. The Loci respondents were charged with making materially false and misleading statements in connection with an unregistered offer and sale of digital asset securities.

According to the Loci order, Wise formed Loci in 2016. Loci provided an intellectual property (IP) search service for inventors and other users through its software platform, InnVenn. Loci and Wise expected to earn revenue from fee-based subscriptions, which users could pay by credit card to access the platform online. According to the SEC, from August 2017 to January 2018, Loci raised $7.6 million by offering and selling digital tokens called “LOCIcoin” through an unregistered and fraudulent initial coin offering (ICO).

According to the Loci order, in promoting the ICO, the Loci respondents made numerous materially false and misleading statements to investors and potential investors, touted the value of LOCIcoin to investors, highlighted their efforts to make LOCIcoin available for trading on digital asset trading platforms, and claimed that LOCIcoin would increase in price as a result of their efforts. The SEC also found that although LOCIcoins constituted securities, Loci’s offering was not registered with the SEC and no exemption from registration applied to the offering.

The SEC therefore found that the Loci respondents had violated the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 under the Exchange Act and Section 17(a) of the Securities Act, and the registration provisions of Sections 5(a) and 5(c) of the Securities Act.

Without admitting or denying the SEC's findings, the Loci respondents agreed to the terms of the Loci order, including cease and desist. The Loci respondents also agreed to undertake to destroy their remaining tokens, request the removal of the tokens from trading platforms, publish the Loci order on Loci’s social media channels, and refrain from participating in future digital asset securities offerings. The Loci order also imposed a $7.6 million civil penalty against Loci.

The Loci SEC order also imposes a bar against Wise from serving as an officer and director of any issuer that has a class of securities registered under Section 12 of the Exchange Act, or that is required to file reports under Section 15(d) of the Exchange Act.

For further information on regulation of digital assets, see Practice Notes:

See also Practical Law's Blockchain Toolkit.