Cracking down on a bad coin offering

Recently, the freshly minted Cyber Unit of the United States Securities and Exchange Commission showed its teeth when it obtained an emergency court order to stop an allegedly fraudulent Initial Coin Offering involving a Quebec-based company, PlexCorps, its founder Dominic Lacroix and his partner, Sabrina Paradis-Royer.

Lisa R. Lifshitz

On Dec. 4, the freshly minted Cyber Unit of the United States Securities and Exchange Commission showed its teeth when it obtained an emergency court order to stop an allegedly fraudulent Initial Coin Offering involving a Quebec-based company, PlexCorps, its founder Dominic Lacroix and his partner, Sabrina Paradis-Royer. The SEC’s complaint charged Lacroix, Paradis-Royer and PlexCorps with violating the anti-fraud provisions, and Lacroix and PlexCorps with violating the registration provisions, of various U.S. federal securities laws. In addition to the return of profits made by the defendants, interest and the application of penalties, the SEC also sought to permanently bar Lacroix from serving as an officer or director of any public company and prohibiting both Lacroix and Paradis-Royer from participating in an offering of digital securities. The SEC was also able to obtain an emergency court order to freeze the assets of PlexCorps, Lacroix and Paradis-Royer.


ICOs raise funds from the public using virtual currency (cryptocurrency) in exchange for their holders receiving proprietary coins or tokens related to a specific venture or project underlying the ICO, such as rights to profits, shares of assets, or rights to use certain services provided by the issuer or voting rights. The tokens are issued on a “blockchain” or secured ledger and may also be listed on online virtual currency exchanges. They may also be tradable for cryptocurrency (i.e. Bitcoin) or fiat currency (i.e. CAD or USD). The value of the coins may increase or decrease depending on how successfully the business executes its business plan using the capital raised.


In September, the United Kingdom’s Financial Conduct Authority published a statement on ICO’s highlighting certain consumer warnings regarding these transactions, which can be high risk given that they operate in a largely unregulated space. The FCA noted many ICOs lack adequate investor protection, are subject to price volatility and have great potential for fraud.  Moreover, instead of receiving detailed prospectus-type disclosure documentation, ICO participants often just receive a “white paper” from the company that could be misleading. Additionally, ICO projects may often be in early stages of development and their business models are experimental, meaning that investors had better be prepared to lose their shirts if things go sideways.


The SEC’s complaint against PlexCorps, Lacroix and Paradis-Royer reads like a “how to go wrong” manual showing how  an ICO can prove to be an investor’s nightmare. 


The SEC claimed that from August onwards, the defendants obtained a combined equivalent of USD$15 million worth of investor funds from thousands of investors globally through materially false and misleading statements, including by promising investors grandiose returns of 1,354 per cent in under 29 days. To make matters worse, Lacroix and Paradis-Royer allegedly misappropriated investor funds and engaged in other deceptive acts.


According to the SEC, investors in PlexCoin were told through various internet and social media platforms (including Twitter, blogs, Facebook and various websites) that they could “Take control of [THEIR] money!” and were promised outlandish returns based on the appreciation in value of their PlexCoin Tokens through (i) the investments that PlexCoin would make with the proceeds of the ICO; and (ii) the managerial expertise of the 48 (later 53) or so PlexCoin international experts principally based in Singapore.  Additionally investors would also earn “enormous” and “real” monies from the profits of PlexCorps and the appreciation in value of the PlexCoin Tokens based on the efforts of the PlexCorps “market maintenance” team who would be listing the tokens on digital asset exchanges and through secondary market trading. Additionally, Lacroix promised to use the proceeds of the PlexCoin ICO to develop other PlexCorps/PlexCoin Token products, such as the PlexWallet and PlexCards. Interestingly, PlexCorps variously stated that the identify of the PlexCorps’ executives had to be kept hidden to make sure no one would be harassed on social media, for “our projects’ security” or otherwise poached by other cryptocurrency competitors. 


All lies, according to the SEC’s complaint. There was no expert PlexCorps team – other than a few Quebec based employees of PlexCorps. The proceeds from the PlexCorps ICO was used to fund Lacroix’s and Paradis-Royer’ personal expenses, including home improvement projects such as lawn services and painting services, and there was no reasonable basis for the returns promised. In fact, PlexCorps had no meaningful project development or business plans other than continuing to enrich the defendants and exploit unwary investors.


Moreover, the SEC alleged that the reason that PlexCorp did not want to disclose the involvement of Lacroix was because he had already been the subject of several Canadian court proceedings and he was ultimately found guilty of securities fraud involving another of his companies in 2013. Even as the Quebec Financial Markets Administrative Tribunal enjoined him again in June in connection with the same company from future violations of the Quebec Securities Act, Lacroix was announcing and promoting the PlexCoin “ICO pre-sale launch.” that was set to begin on Aug. 7, with the official PlexCoin Token launch to launch on Sept. 5. 


By now Quebec’s Autorité Des Marchés Financiers had enough and further to their request on July 20, the Quebec tribunal enjoined Lacroix, PlexCoin, PlexCorps and other related Lacroix companies from engaging in unregistered offerings or distributing investments in PlexCoin Tokens. Significantly, the tribunal found that the PlexCoin Token was a “security” under the laws of Quebec (with a nod to the 1946 U.S. Supreme Court decision in SEC v. Howey). Ultimately neither Lacroix nor PlexCorps abided by this order and the Superior Court of Quebec held Lacroix in contempt on Oct. 17. (PlexCorps ostensibly acknowledged these injunctions by selling t-shirts with a picture of a man making an offensive gesture at the name and logo of QAMF).


In the meantime, Lacroix proceeded to ramp up his efforts to attract U.S. investors, publishing an additional whitepaper for PlexCoin, barring individuals with Quebec IP addresses from accessing the various PlexCoin websites, registering online payment services accounts to receive PlexCoin investor and funds and posting new and tantalizing online advertisements for PlexCoin.


Arguably the real heart of the SEC’s complaint confirms the SEC’s willingness to assert its regulatory authority to challenge and potentially prosecute ICOs that try to evade financial regulations and enforce securities regulation when required to adequately protect investors’ interests. The SEC noted that Lacroix attempted to skirt the registration requirements of U.S. federal securities laws by refashioning the PlexCoin Tokens as the “next decentralized worldwide cryptocurrency based on the Ethereum structure,” likening it to Bitcoin. Instead, the SEC determined the PlexCoin Tokens to be securities within the meaning of the U.S. federal securities laws and that Lacroix was evading his responsibilities under such laws. According to the SEC, the defendents, in connection with the purchase or sale of securities, had engaged in fraud and deceitful practices, made untrue statements of material fact and omitted to state material facts necessary in order for investors to properly evaluate such statements in violation of the U.S. Exchange Act and also violated the U.S. Securities Act. Lacroix and PlexCorps also attempted to sell securities through the use of a prospectus without filing a proper registration statement in addition to other violations. 


The SEC’s actions should not come as a surprise to Canadians. On Aug. 24, the Canadian Securities Administrators issued CSA Staff Notice 46-307 regarding Cryptocurrency Offerings confirming that while some businesses attempt to market their coins/tokens as software products, taking the position that the coins/tokens are not subject to securities laws, in many cases, when the “totality” of the offering or arrangement is considered, the coin/tokens should properly be considered securities. Significantly, the CSA stated that “in assessing whether or not securities laws apply, we will consider substance over form” and accordingly, securities law could apply to coin offerings in Canada.  The CSA also asserted that as each ICO is unique, it must therefore be assessed on its own characteristics on a case-by-case basis. On a positive note, the Ontario Securities Commission’s recent approval of the ICO of Token Funder Inc. on Oct. 17 demonstrated the willingness of regulators such as the OSC to work with potential ICO issuers that are willing to play by the rules and carefully consider the application of relevant securities laws and may serve as a path forward as to how an ICO can be successfully navigated within existing securities laws.


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