FINRA’s First Securities Fraud Charge against a Cryptocurrency

In a September 11, 2018 press release, the Financial Industry Regulatory Industry (FINRA) filed  a complaint against Timothy Tilton Ayre (Agawam, Massachusetts), alleging securities fraud and unlawful distribution of an unregistered security known as HempCoin. This marks the first time that FINRA has filed a complaint against a cryptocurrency issuer.

 

FINRA is “a not-for-profit organization authorized by Congress to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly.”

 

Since broker-dealers are often involved in the marketing of securities, FINRA recognizes them as the key object for regulatory oversight. This oversight is reinforced by the authority to file complaints against alleged securities law violators which may result in “fine, censure, suspension or bar from the securities industry, disgorgement of gains associated with the violations and payment of restitution.”

 

The allegation in this case is that Ayre marketed HempCoin as a security token, “equivalent to 0.10 shares of RMTN common stock,” without registering the token as a security or applying for registration exemption. Furthermore, the complaint alleges that Ayre “defrauded investors in RMTN by making materially false statements and omissions regarding the nature of RMTN’s business, failing to disclose his creation and unlawful distribution of HempCoin, and making multiple false and misleading statements in RMTN’s financial statements.”

 

As such, the complaint constitutes the first step in an adjudication process that will determine whether penalties are levied against the alleged offender Timothy Tilton Ayre.

 

While this complaint is not a legal finding in and of itself, it is a compelling sign of things to come in the broader cryptocurrency community.

 

Concerns over regulatory actions against unregistered token issuers are mounting off the back of SEC investigative reports and the arrival of this FINRA complaint.

 

Our view is that the issues brought to light in this case also highlight the need for standardization and regulatory compliance in the crypto space, two features that security tokens elegantly solve for.

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