The latest caper in the
fast-moving world of initial coin offerings comes from a company that aimed to
raise $1 billion and claimed to raise $600 million.
In reality, it may not
have raised much more than $1 million.
Federal regulators
moved to halt the coin offering of Dallas-based AriseBank, in one of the
biggest U.S. interventions yet into the world of raising money by issuing
digital tokens.
Initial coin
offerings have been an investing fad over the past year, attracting cash
from technology investors and speculators drawn to the idea
that the tokens will give them a profitable piece of the open-ledger
“blockchain” technology that backs bitcoin and other virtual currencies.
Regulators though have warned of
increasingly blatant fraud in the coin offerings, and Facebook Inc. Tuesday said
it would ban ads on its site for products including coin offerings and cryptocurrencies
because they are “frequently associated with misleading or deceptive”
practices.
On Tuesday, the
Securities and Exchange Commission separately said it obtained a court order,
unsealed late Monday, that permits a receiver to seize cryptocurrencies held by
AriseBank, which allegedly marketed and received the proceeds from the coin
offering. The SEC called the deal a “scam” and alleges the company and its
executives misled investors about buying a federally insured bank and its
ability to offer a VISA card backed by “any of 700-plus cryptocurrencies.”
AriseBank’s ICO
featured some of the hallmarks of suspicious deals that the SEC has repeatedly
warned about. The company signed up a celebrity endorser—retired boxer Evander
Holyfield—and made heady claims about the scope of its business, claiming to be
“one of the largest cryptocurrency platforms ever built” and the world’s first
“decentralized bank,” according to an SEC complaint filed in federal court in
Dallas.
AriseBank apparently
ran its offering on a network called BitShares, a popular cryptocurrency
platform. A check of public records there shows that the bank’s initial coin
“wallet” collected about $1.1 million, according to Galen Moore, publisher of a
research firm called Token Report.
Lawyers secured a
“couple million” dollars worth of cryptocurrencies from the company, according
to two people familiar with the matter. On Jan. 18, the company issued a press
release saying it had raised $600 million and expected to raise more than $1
billion when it was finished.
The SEC says the people behind
AriseBank, including Jared Rice Sr. and Stanley Ford, committed fraud. The
hagiography on Mr. Rice’s
personal website portrayed him as somebody who fought against
extreme odds, with a “sad but inspiring” personal story. He lists himself as
chief executive of a firm called Dotoji, and explains his purported work as an
entrepreneur and activist.
Mr. Rice, 29, told a radio interviewer
last week that FBI agents on Friday raided a location where he had been
sleeping. “I got woken up that morning with guns pointed at me,” he said on
Coast to Coast AM, a late-night radio talk show that says it delivers “the
latest paranormal news.” A recording of the interview
was posted on YouTube.
The FBI executed a
search warrant at the location, according to people familiar with the matter.
Neither Mr. Rice nor Mr. Ford were available for comment.
In its complaint, the
SEC faulted AriseBank for failing to tell investors that Mr. Rice is on
probation for felony theft and tampering with government records. Texas state
records show Mr. Rice was arrested in July 2015 on those charges, pleaded
guilty and received a four-year probationary sentence.
The company’s coin
offering lasted from November until January, when Texas state regulators
ordered the company to stop calling itself a bank. The company didn’t comply
with the order and issued a press release on Jan. 18 that it had acquired a
federally insured bank, KFMC Bank Holding Company, which would enable it to
offer clients easier access to cryptocurrencies. The SEC’s complaint says the
bank was never federally insured, nor does any business operating under that
name appear to be registered in the U.S.
Mark Rasmussen, an
attorney at law firm Jones Day, was appointed as receiver in the case, which
allows him to take control of the business and identify sources of funds that
could be returned to investors.
Many coin-offering
sponsors claim they are a regulatory gray area and exempt from federal
oversight. The SEC says they are often equivalent to regulated sales of debt or
equity.
The SEC said AriseBank
violated securities laws by not registering its coin offering with the
regulator. AriseBank also didn’t provide investors with required disclosures
about its business and financial history.
AriseBank stoked
controversy in December when it claimed a partnership with BitShares and Mr.
Holyfield to raise $1 billion for charities and disaster relief. Mr. Holyfield
wasn’t immediately available for comment.
Stan Larimer, who
oversees the BitShares platform as chief executive of a private company,
Cryptonomex, said the relationship was merely one of cross promotion. There
were no signed agreements or money changing hands. But he strongly supported
Mr. Ford and Mr. Rice. “Far as I can tell,” he said in an interview, “all we
have is a collection of false statements made about them.”
Mr. Larimer said the
promotion now would be scrapped. “There’s nothing left to do,” he said.
Click
here for the original article from The Wall Street Journal.