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The Securities and Exchange Commission has charged a man and two companies for operating fraudulent initial coin offerings.
According to a statement released Friday, the financial watchdog alleges Maksim Zaslavskiy and his two companies, REcoin Group Foundation and DRC World, defrauded investors and sold unregistered securities in two fake ICOs.
REcoin, a blockchain-based real-estate company, and DRC World, a diamond membership club, issued fake tokens to investors and promised high-returns without “real operations,” according to the SEC.
ICOs allow startups to raise money by issuing their own cryptocurrencies.Recently, ICOs have come under scrutiny by regulators because companies can use them to raise quick money without having to disclose substantive information to investors.
The SEC said REcoin misled investors, saying it had a “team of lawyers, professionals, brokers, and accountants” who would handle all real-estate investments when no such team existed.
Similarly, DRC World was a shell, according to the SEC. The company falsely told investors that it had an inventory of diamonds when it did not.
“Investors should be wary of companies touting ICOs as a way to generate outsized returns,” said Andrew Calamari, director of the SEC’s New York regional office.”As alleged in our complaint, Zaslavskiy lured investors with false promises of sizeable returns from novel technology.”
The SEC froze the personal assets of Zaslavskiy and his companies after getting an emergency court order, according to the agency.
In July, the SEC announced certain ICOs would be subject to regulatory scrutiny. Other countries, such as China and South Korea, have deemed initial coin offerings illegal, because of concerns of fraud.
The market for ICOs has exploded this year with over $2 billion raised, according to data from Autonomous NEXT.
Schwark Satyavolu, a general partner at Trinity Ventures, a venture capital firm, is an ICO skeptic who told Business Insider he thinks there’s a bubble in the market.
“If investments continue at the current rate, this could become the next mortgage crisis with people – including institutional investors – losing hundreds of millions of dollars when (not if) many of these companies go out of business,” Satyavolu said.
Still, many market-watchers are excited about the potential of ICOs, despite the bad actors.
“There’s always a few bad apples out there, but on the majority, blockchain leaders and CEOs are doing great things to financial services, supply chain, logistics, healthcare, agriculture, real estate, biotech, data, retail and government operations,” Perry Woodin, the CEO of Node40, a blockchain technology company, said in a statement emailed to Business Insider.