Creators of fraudulent crypto assets beware. A recent court decision supported investors, creators and marketers of legitimate crypto assets, and the integrity of the crypto asset market as a whole.
While the creator of BitConnect remains at large and is facing his own indictment for his role in the scheme that allegedly defrauded investors of $2.4 Billion, this case focuses on the promoters and marketers of a commodity known as BitConnect Coin.
The U.S. Department of Justice has obtained an indictment that BitConnect Coin was not a legitimate investment. It was a Ponzi scheme. Existing investors returns were paid for and driven by the capital of new investors.
In a private lawsuit brought against promotors of BitConnect, the plaintiffs alleged (among other allegations) that the promotors violated section 12 of the Securities Act by selling unregistered securities through their BitConnect videos. Some defendants moved to dismiss, arguing that they were only liable under the Securities Act if they had offered or sold the plaintiffs a security. They claimed they had not, because their videos did not “directly communicate” with the plaintiffs. The District Court granted the motion to dismiss, but the case at hand in the United States Court of Appeals, Eleventh Circuit, reversed the lower court’s decision and remanded the case for further proceedings.
The Appellate Court held that a person can solicit a purchase via videos posted to promote a security in a mass communication. The court held that these online videos are no different from other forms of mass communication such as newspaper or radio advertisements. This judgment is consistent with the longstanding interpretation of the Security Act, that a solicitation does not need to be “personal” to trigger liability. Broadly disseminated communications such as newspaper and radio advertisements can convey a solicitation, and now so can social media posts and online videos. This ruling firmly places new forms of communication such as online videos and social media posts as being no different from mass communication predecessors such as newspaper and radio advertisements, and therefore makes those who promote securities on social media potentially liable under section 12 of the Securities Act.
The use of social media has created a tremendous opportunity for entrepreneurs who are creating innovative products and solutions in the crypto asset market. However, as this case demonstrates, it also creates a dangerous mix. In what essentially amounts to a modern day gold rush, fraudsters have sought to capitalize on the opportunity that has presented itself now that technology has created new forms of investment and solicitation. Creators and marketers of crypto assets can now reach a global audience of millions through podcasts, social media posts, online videos, and weblinks. The court’s ruling helps remove the gray area that these fraudsters attempt to use to avoid liability, and makes this wild west a little safer.
Trust is paramount when it comes to money, markets, and consumers. Ultimately, this ruling helps create a more reliable marketplace where capital is more likely to flow to legitimate sources because it is becoming more difficult for fraudsters to operate in this space without any repercussions. Creators and marketers of legitimate crypto assets should celebrate, and fraudsters should beware, because the law is catching up.
Paul Guirguis assisted in the preparation of this post.