Drop the hammer
In September 2018, the U.S. Securities and Exchange Commission settled with Crypto Asset Management for $200,000 over claims that the company broke securities laws by failing to register as an investment company with appropriate regulators.
This is the first instance of the SEC coming down on a cryptocurrency investment firm, instead of merely interacting with cryptocurrencies themselves or going after fraudulent companies. While the SEC holds that Bitcoin and Ether are not to be considered securities, initial coin offerings (ICOs) are regarded as a type of security and, therefore, subject to securities regulations.
These legal actions show the SEC expanding its involvement in the cryptocurrency market, marking the start of a new era in how much regulators interact with cryptocurrencies and investors. Cryptocurrency asset management is an emerging industry that, until now, has seen little attention from securities regulators. However, that seems poised to change with the SEC’s new ruling.
No harm, yes foul
Crypto Asset Management, based in La Jolla, California, advertises itself as a fund manager that manages the crypto portfolios of individuals and companies with high net worth. The company claims it eliminates the need to possess crypto wallets and keys by using a single fund investment model. It bills itself as a resource of experts in cryptocurrency and investing that enables individuals and companies to get involved in the crypto market without taking on the responsibilities associated with managing individual currencies and accounts. By 2018, the company had $37 million in managed assets. This included both cryptocurrencies and other assets, such as ICOs.
The SEC’s legal action states that Crypto Asset Management solicited $3.6 million from just 44 private investors, most of whom were individuals. According to the SEC’s filing, the company ceased public offerings and gave investors a buyback option as soon as it was notified of the cease-and-desist order. The SEC also stated that the failure to properly file was intentional. Crypto Asset Management has neither confirmed nor denied the SEC’s charges but agreed to pay the fine and comply with the order.
The SEC’s filing also stated that founder and Managing Director Timothy Enneking is not associated with the commission in any way, despite his previous creation and management of other private crypto funds in the United States as well as Eastern Europe. It also stated that the connections to investors that the legal filing aimed to challenge were not personal connections, but investor relationships built through regular advertising and outreach.
Enneking said that the events cited by the SEC happened late in 2017 and that Crypto Asset Management was fully compliant with the SEC’s order. He also stated that no damage was done to any investors through either Crypto Asset Management’s or the SEC’s actions.
In related news, the SEC filed another cease-and-desist order against TokenLot, an unregistered cryptocurrency broker, on the same day, saying that TokenLot also failed to register with regulators and, therefore, broke securities laws by dealing in ICOs. TokenLot was fined $471,000 and, like Crypto Asset Management, did not admit fault or challenge the SEC’s ruling.