The Securities and Exchange Commission (SEC) has slapped a crypto asset hedge fund and an ‘ICO Superstore’ with penalties.
A digital asset hedge fund manager was charged with misrepresentations and registration failures, marking the SEC’s first-ever enforcement action finding an investment company registration violation by a hedge fund manager based on its investments in digital assets.
Crypto Asset Management LP or CAM allegedly marketed itself falsely as the “first regulated crypto asset fund in the United States” while actually operating as an unregistered investment company. California-based Timothy Enneking raised $3.6 million in 4 months during an unregistered public offering which Enneking falsely claimed at the time was SEC regulated. By doing this and then investing over 40% of the fund’s assets in cryptocurrencies, Enneking broke multiple SEC regulations and was served with a cease and desist letter. The company halted operations and offered buybacks to investors. CAM and Enneking agreed to pay a $200,000 fine.
The second company to be hit by the SEC was an “ICO Superstore” called Token Lot. In another milestone case, this is the first case charging unregistered broker-dealers for selling digital tokens after the DAO Report was published in 2017 advising dealers and investors that digital securities must be federally compliant.
Ran by Lenny Kugel and Eli L. Lewitt, Token Lot was marketed as a way of buying ICO tokens and partake in trading afterward. The company processed orders from 6,100 different investors and dealt in over 200 different digital assets, some of which have now been determined to be securities by the SEC.
Lewitt and Kugel were not registered as securities brokers despite dealing in security tokens and trading company profits for the same. Token Lot was operational from February to July 2017 until an SEC investigation led the founders to voluntarily halt operations and offer refunds on unfilled orders, actions which the SEC says led to lighter penalties, which nevertheless included a $471,000 disgorgement fine with $7,929 in interest as for the company as well as personal fines of $45,000 each for Kugel and Lewitt. The founders, who neither admitted to nor denied the charges leveled against them, will also need to pay to retain the services of a third party to destroy any remaining Token Lot inventory.
The charges are likely a sobering outcome for the many unregistered or noncompliant companies and individuals throughout the US who have been dealing in what the SEC is now classing securities tokens, and given that dozens of crypto startups are being investigated by the SEC and hundreds of crypto firms are the focus of the international Operation Cryptosweep, these two cases seem likely to be the first of many more to come.
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Last modified: May 20, 2020 6:00 PM UTC