SEC Penalizes Two Crypto Companies for Failing to Comply With Federal Regulations

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Earlier today, the Securities and Exchange Commission (SEC) revealed that it went after two cryptocurrency establishments for alleged false marketing, according to two press releases via the Commission.

False Pretenses

Allegedly, Crypto Asset Management LP (CAM) and its CEO, Timothy Enneking, had raised over $3 million late last year by falsely claiming itself to be “the first regulated crypto asset fund in the United States.”

The SEC press release states that Enneking and co agreed to the cease-and-desist letter right away, paying a penalty of $200,000 though not admitting to or denying the accusations. CAM also stopped its public offering and “offered buy backs to affected investors.”

This action is the SEC’s first-ever enforcement on “an investment company registration violation by a hedge fund manager based on its investments in digital assets.”

C. Dabney O’Riordan, co-chief of the asset management unit, commented on the matter:

“Hedge funds seeking to ride the digital asset wave continue to proliferate. Investment advisers must be sure that the funds they offer adhere to the applicable registration obligations and must accurately represent their funds’ regulatory status to investors.”

Failure To Comply

A second group, TokenLot LLC, was charged alongside its owners, Lenny Kugel and Eli L. Lewitt, for working as unregistered broker-dealers.

Those accused had “promoted TokenLot’s website as a way to purchase digital tokens during initial coin offerings (ICOs) and also to engage in secondary trading.”

Based in Michigan, TokenLot had handled orders from over 6,100 retail investors and managed over 200 assets, including SEC-registered securities. The business profited from both trading fees and money from ICOs. To legally benefit from these activities, TokenLot and its owners are required to be SEC-registered broker-dealers, which they are not.

Once accused, TokenLot began slowing down business and refunding investors’ unfilled orders. The three were also charged for violation of registration provisions in connection with conduct.

Stephanie Avakian, co-director of the SEC’s enforcement branch, commented,

“U.S. securities laws protect investors by subjecting broker-dealers and other gatekeepers to SEC oversight, including those offering ICOs and secondary trading in digital tokens. We continue to encourage those developing digital asset trading businesses to contact the SEC staff at FinTech@sec.gov for assistance in analyzing registration and other securities law requirements.”

Suggested Reading Learn more about cryptocurrencies by reading one of our beginner’s guides.

Denying Comment

Like with CAM, TokenLot and its founders refused to comment on the accusations but complied with the penalties. The SEC charged for $471,000 in disgorgement and an additional $7,929 in interest. An unrelated third-party will remain to be rid of TokenLot’s leftover assets.

Finally, Lewitt and Kugel each must also pay $45,000, while accepting a ban from the crypto industry, penny stocks, and investment companies for three years—after which they can apply again.

The TokenLot takedown is the SEC’s first case against unregistered broker-dealers since The DAO Report from last year, which stated that groups managing digital securities must follow federal security law.

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