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SEC Busts Businessman, Firms in Initial Coin Offering Scam

By Melanie Waddell

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The Securities and Exchange Commission said Friday that it has charged a businessman and two companies with defrauding investors in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds.

In its complaint, filed in the Eastern District of New York, the SEC alleges that Maksim Zaslavskiy and his companies have been selling unregistered securities, and that the digital tokens or coins being peddled didn’t exist. 

This is the first action the agency has brought involving ICOs.

According to the SEC’s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) were told they could expect sizable returns from the companies’ operations when neither has any real operations.

From July 2017 to the present, the complaint states, Zaslavskiy, the president and sole owner of the companies, fraudulently raised at least $300,000 from hundreds of investors, through various material misrepresentations and deceptive acts relating to supposed investments in digital “tokens” or “coins” offered, first by REcoin, then by Diamond, during the ICOs.

Zaslavskiy touted REcoin as “The First Ever Cryptocurrency Backed by Real Estate.”

Alleged misstatements to REcoin investors included that the company had a “team of lawyers, professionals, brokers and accountants” that would invest REcoin’s ICO proceeds into real estate when in fact none had been hired or even consulted. 

Zaslavskiy and REcoin allegedly misrepresented they had raised between $2 million and $4 million from investors when the actual amount was approximately $300,000.

In an attempt to skirt the registration requirements of the federal securities laws, the defendants Zaslavskiy and Diamond “have refashioned the sale of the purported Diamond interests as sales of ‘memberships in a club,’ and the Diamond ICO as an ‘Initial Membership Offering’ or IMO,” the SEC complaint states.

“In reality, the supposed ‘memberships’ are in all material respects identical to the ownership attributes of purchasing the purported (but, indeed, nonexistent) ‘tokens’ or ‘coins’ and are securities within the meaning of the securities laws,” the complaint says.

The SEC obtained an emergency court order to freeze the assets of Zaslavskiy and his companies.

The SEC’s Office of Investor Education and Advocacy recently issued an investor alert about the risks of ICOs.

“Investors should be wary of companies touting ICOs as a way to generate outsize returns,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “As alleged in our complaint, Zaslavskiy lured investors with false promises of sizable returns from novel technology.”

The SEC’s complaint charges Zaslavskiy, REcoin and Diamond with violations of the anti-fraud and registration provisions of the federal securities laws.

The complaint seeks 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.

The SEC’s investigation is continuing.