House lawmakers took the co-directors of the Securities and Exchange Commission’s enforcement division to task Wednesday on the agency’s oversight of initial coin offerings, with Rep. Brad Sherman, D-Calif., calling on the SEC officials to “shut it all down.”
During a hearing Wednesday on oversight of the SEC, enforcement co-director Steven Peikin told the House Financial Services Committee’s Capital Markets Subcommittee that the division has leveraged its Cyber Unit to address the following areas:
- Market manipulation schemes involving false information spread through electronic and social media;
- Hacking to obtain material, nonpublic information and trading on that information;
- Violations involving distributed ledger technology and initial coin offerings;
- Misconduct perpetrated using the dark web;
- Intrusions into online retail brokerage accounts; and
- Cyber-related threats to trading platforms and other critical market infrastructure.
“In an effort to keep pace with technological change, we’re focusing the enforcement division’s efforts and resources on emerging cyber-related threats and issues, including issues relating to hacking, data breaches, virtual currencies and initial coin offerings,” Peikin told the lawmakers. “We think these are among the greatest risks facing investors and the financial markets today.”
But Sherman told the SEC officials that the agency hasn’t acted quickly enough to protect ICO investors.
“When somebody is trying to fund creation of jobs, they’ve got to do it very carefully or you’re on them for a misstatement in Footnote 27,” he said. “When somebody is selling cryptocurrencies to investors, it’s taken you awhile to shut them down, you’re still wondering, there’s still delay.”
Rep. Carolyn Maloney, D-N.Y., said that there was “strong debate about whether a token that is offered in an ICO can be a security when it is first issued to investors and then later evolve into something that is not a security.”
Stephanie Avakian, co-director of the enforcement division along with Peikin, responded “that’s really a question for the agency’s Division of Corporation Finance.”
That said, “it’s always going to be a facts and circumstances test as to whether something meets the definition of a security,” Avakian said. “If the substance of something changes over time, that analysis is going to have to continue to happen. But we really do look at the substance of the transaction, not the name of it.”
The SEC’s Office of Investor Education and Advocacy also released Wednesday a mock initial coin offering website, HoweyCoins.com, that mimics a coin offering to educate investors about what to look for before they invest in a scam. Those clicking on “Buy Coins Now” will be directed instead to investor education tools and tips from the SEC and other financial regulators.
Impact of Supreme Court’s Kokesh Decision
In the last fiscal year, the commission returned a record $1.07 billion to harmed investors, Peikin said.
However, despite the agency’s ability to recover funds for investors, Peikin told the lawmakers, the recent Supreme Court decision in Kokesh vs. SEC “threatens” the agency’s ability to continue to recover investor funds when it comes to “long-running frauds.”
That decision, Peikin said, held that “claims for disgorgement were subject to a five-year statute of limitations. As you would expect, many fraudsters try to conceal their schemes, some are successful and defraud investors for years before they’re discovered.”