On May 29, 2018, documents were made public showing that the U.S. Securities and Exchange Commission (SEC) obtained a court order from a Federal Court in Los Angeles to shut down an ongoing initial coin offering (ICO) and place an emergency asset freeze and receivership on the company conducting the ICO, Titanium Blockchain Infrastructure Services Inc. (Titanium). Filed on May 22, 2018, the SEC’s complaint charges Titanium and its president with defrauding investors and violating federal securities registration requirements.
Titanium proposed to use blockchain technology to develop a platform for a variety of IT services, including network infrastructure and computing services. The company allegedly raised upwards of $21 million from dozens of investors in the United States and abroad in connection with its ICO.
The action against Titanium was motivated in part by misleading claims from company president Michael Alan Stollery, a/k/a Michael Stollaire, a self-described “blockchain evangelist.” Using social media sites and YouTube video campaigns, Mr. Stollaire allegedly lied about business relationships he had with federal regulatory agencies and several leading Fortune 500 companies. He also allegedly lied about ownership of certain trademarks related to the company’s products and services. The SEC viewed these misrepresentations as material because they “relate to the legitimacy of [Titanium’s] products, services, and slogans, and consequently to [Titanium’s] ability to develop and market its platform and the likelihood that investors will receive any return on their investment or the return of their principal.”
The SEC also pointed out that, despite the company's claims that its token was a "utility token," the token did not have any functionality at the time of the ICO, the token was sold as an investment, and there was no platform to access or way to use the token at the time of the ICO.
Additionally, the SEC emphasized that the company and its president made significant efforts to generate trading activity in the token, including by getting the token listed on exchanges around the world. Indeed, shortly after the ICO ended, the token traded actively on several digital asset platforms.
The enforcement action highlights that the SEC continues to crack down on fraudulent ICOs and to treat many digital assets, tokens, and coins as securities. Token creators must take extra care to comply with securities laws, including when making public and private factual claims about their digital products and related companies.
A copy of the SEC’s complaint is available at https://www.sec.gov/litigation/complaints/2018/comp-pr2018-94.pdf.
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