
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comFirm Insights
Author: Dan Brecher
Date: December 12, 2017
Counsel
212-286-0747 dbrecher@sh-law.comWith the price of Bitcoin rising and blockchain technology gaining increasing legitimacy, Initial Coin Offerings (ICOS) are gaining popularity with investors. However, as highlighted by two recent SEC enforcement actions, ICOs are extremely risky investments and in some cases, may be completely fraudulent. In such cases, private investors have available remedies that include prosecuting their own lawsuits alleging fraud and even Civil RICO claims where a pattern and other requisite facts can be alleged.
As more fully discussed in a prior article, businesses are increasingly using initial coin offerings, also called token sales, to raise capital. Virtual coins are created and disseminated using distributed ledger or blockchain technology. Purchasers may use U.S. dollars or virtual currencies to purchase virtual coins or tokens.
The profits of ICOs may be used to fund the development of a digital platform, software, or other projects. In addition, investors may use the virtual tokens or coins to access the platform, use the software, or otherwise participate in the project. After they are issued, the virtual coins or tokens may also be resold to others in a secondary market on virtual currency exchanges or other platforms.
The Securities and Exchange (SEC) recently brought enforcement actions against two companies for defrauding investors in ICOs purportedly backed by investments in real estate and diamonds. According to the agency, Maksim Zaslavskiy and his companies lured investors by touting a novel technology that would deliver substantial returns. However, the digital coins didn’t really exist.
According to the SEC’s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) were promised sizeable returns from the companies’ operations. However, neither company had any real operations.
Zaslavskiy allegedly touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate.” Although he also told investors that the company had a “team of lawyers, professionals, brokers, and accountants” that would invest the ICO proceeds into real estate, none had been hired or even consulted. Zaslavskiy and REcoin also allegedly misrepresented that they had raised between $2 million and $4 million from investors when the actual amount was approximately $300,000.
According to the SEC’s complaint, Zaslavskiy used his Diamond Reserve Club to execute a similar fraud. Zaslavskiy represented to investors that the company invests in diamonds and obtains discounts with product retailers for individuals who purchase “memberships” in the company. In reality, the SEC alleges that Zaslavskiy and Diamond have not purchased any diamonds nor engaged in any business operations.
Based on the false representations and the sale of unregistered securities, the SEC is seeking permanent injunctions and disgorgement plus interest and penalties. For Zaslavskiy, the SEC also seeks an officer-and-director bar and a bar from participating in any offering of digital securities.
Defrauded ICO investors will have viable claims, with the biggest obstacle to actual recovery of their losses being finding recoverable assets. While some investments are governed by federal securities laws, most ICOs are not regulated and/or are based overseas. So when something goes wrong, following the money and tracing the assets or the fraudsters after obtaining a judgment is the required effort if no settlement is negotiated.
As the SEC highlighted in a recent Investor Alert, third-party wallet services, payment processors, and virtual currency exchanges that are involved in the use and exchange of virtual currencies may also be located outside of the United States or be operating unlawfully. In addition, regulators and law enforcement agencies face a range of challenges in investigating ICO fraud. As detailed by the SEC, they include:
For investors, there are several steps that you can take to increase the chances that you may recover some of your investment losses. For instance, it is imperative to report the fraud to state and federal securities regulations as soon as you suspect something is wrong. This could be important to enable a freeze on assets before they are transferred. In most cases, scammers will quickly try to cover their tracks. Defrauded investors should consult with experienced counsel as soon as possible. A knowledgeable attorney can help determine whether any securities laws were violated and take steps to pursue all available legal remedies. I have successfully pursued civil RICO claims, and I found the treble damages and recoverable legal fees provisions authorized for civil RICO claims helpful in negotiating the settlement of civil RICO claims.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Dan Brecher, at 201-806-3364.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Merging two companies is a complex legal and business transaction. A short form merger, in which an acquiring company merges with a subsidiary corporation, offers a more streamlined process. However, like all M&A transactions, it is important to understand the legal nuances and proper due diligence in mergers and acquisitions. What Is a Short Form […]
Author: Dan Brecher
The Trump Administration’s new tariffs are having an oversized impact on small businesses, which already tend to operate on razor thin margins. Many businesses have been forced to raise prices, find new suppliers, lay off staff, and delay growth plans. For businesses facing even more dire financial circumstances, there are additional tariff response options, including […]
Author: Brian D. Spector
Business partnerships, much like marriages, function exceptionally well when partners are aligned but can become challenging when disagreements arise. Partnership disputes often stem from conflicts over business strategy, financial management, and unclear role definitions among partners. Understanding Business Partnership Conflicts Partnership conflicts place significant stress on businesses, making proactive measures essential. Partnerships should establish detailed […]
Author: Christopher D. Warren
*** The original article was featured on Bloomberg Tax, April 28, 2025 — As a tax attorney who spends much of my time helping people and companies who have large, unresolved issues with the IRS or one or more state tax departments, it often occurs to me that the best service that I can provide […]
Author: Scott H. Novak
On January 28, 2025, the Trump Administration terminated Gwynne Wilcox from her position as a Member of the National Labor Relations Board (NLRB or the Board). Gwynne Wilcox, a union side lawyer for Levy Ratner, was confirmed to the Board for an original term in 2021 and confirmed again for a successive five-year term expiring […]
Author: Matthew F. Mimnaugh
Breach of contract disputes are the most common type of business litigation. Therefore, nearly all New York and New Jersey businesses will likely have to deal with a contract dispute at least once. Understanding when to file a breach of contract lawsuit and how long you have to sue for breach of contract is essential […]
Author: Brittany P. Tarabour
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!