ICO Investigations and SEC Enforcement.

SEC staff conduct inquiries and formal investigations based on several types of suspected violations. In digital-asset cases, these include, among others:

• Offering digital tokens as securities without registering the offering (or meeting an applicable exemption);
• Using fraudulent means or deceptive conduct to offer, sell, or promote unregistered securities; and,
• Operating as a securities exchange without registering with the SEC.

As a result, SEC scrutiny in ICO cases can reach all participants involved, from issuers, exchanges, and platforms to executives, advisers, and promoters.

The SEC shares civil enforcement authority over ICO-related frauds with the Department of Justice (DOJ), which has the authority to pursue criminal charges in federal court. In many cases, SEC and DOJ investigations run in parallel. If the DOJ determines that criminal prosecution is warranted, this investigation can shift into the early stages of an ICO fraud prosecution.

Beyond unregistered securities offerings and ICO fraud, the SEC has been pursuing other types of enforcement actions in the crypto world as well. These include, among others, taking action against:

• Businesses for allegedly operating unregistered securities exchanges;
• Unregistered investment advisors (some of which appear to operate as digital-asset exchanges);
• Individuals for allegedly soliciting unregistered securities through crowdfunding platforms;
• Digital-asset platforms for allegedly offering unregistered securities, often in violation of the Securities Act, the Securities Exchange Act, and Investment Advisers Act;
• Bitcoin mining companies, digital-asset exchanges, and other businesses that are alleged to have committed securities law violations; and,
• Companies and individuals for conducting ICOs that are alleged to have violated Regulation Crowdfunding.

Many investigations involving digital assets begin with tips from whistleblowers. The SEC’s whistleblower program pays awards to those who provide original information that leads to a successful enforcement action, which serves as a significant incentive to report alleged ICO fraud and other suspected securities law violations.

How Does the SEC Decide Whether an ICO Token is a Security?

The standard for determining whether an ICO token is a security is the federal investment-contract test, which originated in the case of Securities and Exchange Commission v. W.J. Howey Co. Under the Howey test, “a security is any contract, transaction or scheme, regardless of the form it takes or the label used, that meets all of the following: (1) investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, and (4) derived primarily from the entrepreneurial or managerial efforts of others.”

The labels that ICO issuers use for tokens, and any utility they promise to provide, will not override a transaction’s economic realities. If the economic realities of an ICO transaction meet the criteria set forth in the Howey test, it constitutes the offering and sale of securities. With this conclusion in hand, the SEC will then assess the transaction’s compliance with the federal securities laws. The Securities Act governs unregistered securities sales and offers in Sections 5(a) and 5(c), and it prohibits fraud in securities offerings and sales in Section 17(a). The Securities Exchange Act prohibits securities fraud and deceptive schemes in Section 10(b) and Rule 10b-5.

ICO participants will also be at risk of violations under the U.S. Commodity Exchange Act if they use the exchange for offerings and sales of digital assets without registering as a broker, commodity pool, or commodity pool operator. The Commodity Futures Trading Commission is the federal securities law authority that has jurisdiction over these offenses. If the CFTC finds that a violation has been committed, it can pursue enforcement through administrative or civil judicial proceedings.

What Are the Defenses in ICO Fraud Cases?

In a recent case, the U.S. District Court for the Southern District of New York dismissed the SEC’s lawsuit against Richard Heart, a crypto entrepreneur who has been accused of running an ICO fraud scheme.

The defendant argues that his ICO offerings are exempt from registration under Regulation S, which provides a safe harbor for qualifying offshore securities offers and sales. The SEC argues, however, that the offerings conducted by his company, Network Services, do not qualify under Regulation S.

The district court agreed with the defendant and dismissed the SEC’s complaint, with the court ruling that the SEC did not adequately challenge the defendant’s assertions of Regulation S exempt status.

Who Can Be Liable for an ICO or Token Sale?

Securities law enforcement exposure for ICOs and other digital-asset transactions can vary significantly depending on the specific allegations involved. Some of the most frequently invoked statutory provisions include:

• Section 17(b) of the Securities Act, which provides that “no person shall publish or cause to be published in any medium of general circulation or dissemination, any report or information which- (1) describes or discusses any security, or any group of securities, or any potential investment opportunity involving securities . .., or (2) recommends the purchase or sale of any security, or any group of securities, . .. unless, (a) he also discloses in such communication that he has received, or will receive, consideration from an issuer, underwriter, or dealer in such security, or from any person acting on behalf of any such issuer, underwriter, or dealer, and (b) his communication also discloses, (i) the nature of the consideration received, (ii) the source of the consideration, and (iii) the amount of the consideration.”
• Section 5 of the Exchange Act, which provides that “No person shall use or cause to be used any facility or means of communication to engage in the business of a national securities exchange unless he has, at the time made registration with the Securities and Exchange Commission . .. or has obtained an exemption.”
• Section 15(a) of the Exchange Act, which provides that “No person shall hold himself out as a broker or effect any transaction in securities for the account of another unless he is registered as a broker with the Commission.”
• Section 203 of the Investment Advisers Act, which provides that “No person shall engage in the business of investment advice, either directly or indirectly, as a principal or as an agent . .. unless he is registered or registered as an investment adviser with the Commission.”
• Section 20(a) of the Exchange Act, which allows the SEC to seek control-person liability against executives, directors, and others who exercise or possess the power to control the actions of companies that violate securities laws.
• Section 20(e) of the Exchange Act, which allows the SEC to seek liability against individuals and companies for aiding and abetting broker, dealer, or issuer securities law violations.
• Fund managers, investment advisers, and other financial institutions can also face SEC scrutiny in relation to ICO-related transactions.

What Should I Do After an SEC Inquiry or Subpoena?

As discussed above, SEC scrutiny targeting ICO participants usually begins as either an informal inquiry or a formal investigation. After an informal inquiry, the SEC Commission may issue a formal order establishing a formal investigation. Once the Commission issues a formal order, designated SEC officers are empowered to seek testimony and other evidence pursuant to Section 21(b) of the Exchange Act, which requires that “each person subpoenaed, shall, upon examination of his or her books, papers, records, or accounts or upon the production of any other relevant evidence required . .. appear and give testimony, or produce evidence, as the Commission shall direct.” If you fail to comply with an SEC subpoena, the SEC will typically request that a federal district court enforce the subpoena.

The Securities and Exchange Commission generally specifies a response date in its subpoenas, and while there is no universal response period, there are statutory and regulatory requirements that apply in most cases. If you have been subpoenaed by the SEC in connection with an ICO investigation and have questions about the validity of the subpoena, when you need to respond to the subpoena, or how to respond, you should consult with counsel.

Our SEC defense lawyers provide representation to companies and individuals targeted in SEC enforcement matters. We take a comprehensive approach to our clients’ defense, addressing all pertinent aspects of the SEC’s investigation or enforcement proceedings. Our approach includes:

• Working with the SEC’s investigators and lawyers to gain a clear understanding of the circumstances at hand;
• Advising our clients regarding the preservation of all relevant information as required by the federal rules, statutes, and case law;
• Reviewing our clients’ transactional records, correspondence, and social media posts for evidence that demonstrates compliance with applicable securities laws;
• Preparing a narrative and presenting a narrative to the SEC that affirmatively supports an affirmative defense or a lack of liability;
• Developing and executing a litigation strategy for use in federal court if necessary; and,
• Helping our clients manage all other aspects of the SEC’s investigation or enforcement proceedings.

A party’s duty to preserve relevant information is triggered when litigation is reasonably anticipated. As explained by the U.S. Department of Justice and the U.S. Department of Defense in the Federal Manual of Criminal Procedure and the Criminal Justice Resources Manual, companies and individuals have a duty to preserve and produce “documentary and electronic evidence, including records, emails, logs, notes, and other data stored on servers and other media devices.” This preservation duty applies whether the information has been requested through an SEC subpoena or is relevant to the investigation at hand. If you learn about an SEC investigation and believe it could lead to an enforcement action, seek representation from an ICO defense lawyer promptly.

If you receive a subpoena from the SEC, you will have the right to seek representation from a law firm of your choice. A lawyer who has experience in securities law enforcement and who can assist you with all aspects of the SEC’s investigation or enforcement proceedings will be invaluable. An ICO defense lawyer can help you respond to the subpoena and prepare an effective defense strategy.

What Should I Do if I Am Subject to an ICO Fraud Investigation?

When facing an ICO fraud investigation, your first priority should be to contact a law firm that can defend you. An ICO defense lawyer can guide you through the investigation and represent you effectively.

With this, your ICO defense lawyer will be able to:

• Advise you regarding your rights and the information you are required to disclose;
• Gather all of the relevant information in your case, review it to determine your best defense, and craft an effective strategy;
• Interact with the SEC’s investigators and lawyers on your behalf; and,
• Guide you through all stages of the investigation.

Can I Have My Lawyer Present if I Am Witnessing an ICO Fraud Investigation?

Yes. As a witness in an ICO fraud investigation, you are entitled to have a lawyer present during your testimony. You can find the specifics under 17 C.F.R. §203.7. With this knowledge, your ICO defense lawyer can help you prepare a favorable testimony and ensure you only share what you need to.

The most important advice we can give you is to be honest with the SEC’s investigators. Making a false statement to a federal agent is a federal crime under 18 U.S.C. §1001, which says “Whoever, knowingly and willfully, makes any materially false, fictitious, or fraudulent statement or representation . .. in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, shall be fined under this title or imprisoned not more than five years, or both.”

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

Should an ICO Company Self-Report or Conduct an Internal Investigation?

In some cases, companies may become aware of potential securities law violations before the SEC or DOJ makes contact. These companies sometimes conduct internal investigations to determine whether they need to self-report and make any necessary remediations. Along with this, the potential for cooperation credit in the future should also be considered as well. According to the SEC’s Seaboard Report, a company’s efforts to self-police, self-report, and remediate should be taken into account in order to determine the company’s entitlement to cooperation credit.

However, conducting internal investigations can be challenging, particularly in ICO cases. With the issues of corporate attorney-client privilege, joint representation, and corporate reimbursement and advancement in mind, it is important to take a cautious approach.

How is Corporate Attorney-Client Privilege Determined?

The attorney-client privilege is a key aspect of any internal investigation. Within a corporation, however, it is the corporation that controls the privilege, not the individual employees involved. When company counsel is appointed to represent individual employees, counsel will need to issue “Upjohn warnings” to advise employees that counsel represents the company, and not the employees, and that company counsel will be able to disclose any privileged information to the company if necessary.

Without a clear understanding of the corporate attorney-client privilege, making an informed decision about whether to self-report, cooperate with the government, and accept any corporate reimbursement and advancement will be challenging.

In addition to attorney-client privilege, individual employees and executives in the ICO world should also consider the potential for joint representation. If a company’s counsel also represents an individual employee or executive, this can create a potential conflict of interests between the company and the employee. It is crucial to avoid these conflicts of interests in order to prevent any future issues that could compromise the individual’s legal defense.

Ultimately, if you have any questions about these issues, seek representation from an experienced law firm promptly.

Can Individuals Seek Indemnification and Advancement for Legal Expenses in ICO Cases?

The rules and requirements for seeking corporate indemnification and advancement for legal expenses vary. In general, these issues are determined by a corporation’s governing documents and applicable state law. Our ICO defense lawyers can help you negotiate with your employer or the company board for appropriate indemnification and advancement of legal expenses.

How Do Parallel SEC, DOJ, and CFTC Investigations Affect Strategy?

Digital-asset matters can involve multiple regulatory investigations and enforcement proceedings. In addition to the SEC, these can include the CFTC, DOJ, FINRA, NFA, and various state or other regulators. Securities class actions can also coincide with these investigations.

Each type of investigation can create specific challenges when facing scrutiny from multiple government authorities at once. For example, invoking the Fifth Amendment to refuse to answer questions during a criminal investigation may support an adverse inference in a civil proceeding. The SEC also has information-sharing authority under Section 24(c) of the Exchange Act.

The other regulatory authorities mentioned above are the following:

Commodity Futures Trading Commission (CFTC)

The CFTC is the federal authority that handles inquiries and enforcement proceedings in cryptocurrency and other digital-asset matters involving commodities, such as Bitcoin, and other digital assets that serve a similar role. The CFTC can also seek enforcement action in matters involving digital assets that support derivatives trading.

Department of Justice (DOJ)

The DOJ is the federal authority that prosecutes federal crimes arising from ICO fraud, token sales, and other illicit conduct.

Securities and Exchange Commission (SEC)

The SEC is the federal authority that handles inquiries and enforcement proceedings in ICO and other digital-asset matters involving securities law violations.

Other Federal, State, and International Regulatory Authorities

As shown by a recent lawsuit filed by the state of Texas in conjunction with the SEC, ICO participants and others in the digital-asset market can also face scrutiny from state regulatory authorities. In addition, while the securities fraud cases we are referring to involve participants operating in the United States, ICO fraud cases often involve international participants that are also subject to enforcement proceedings in the countries where their ICO offerings are available.

Grand Jury Matters

If you are facing scrutiny in a grand jury matter, a very specific set of rules and regulations will apply. Federal Rule of Criminal Procedure 6(e) prohibits the disclosure of grand jury matters and requires that grand jury matters remain confidential. If you are facing scrutiny as part of a grand jury matter, you should consult with an ICO defense lawyer to learn more.

Do Changing SEC Crypto Priorities Protect Older ICO Conduct?

The SEC has undergone several changes to its priorities in recent years. For example, on January 21, 2025, the SEC launched its Crypto Task Force. A similar, though related, development occurred on February 20, 2025, when the SEC announced the launch of its Cyber and Emerging Technologies Unit, which replaced the Crypto Assets and Cyber Unit. With these developments in mind, what does this mean for ICO participants facing SEC scrutiny in relation to their past conduct?

When companies and individuals involved in ICOs face SEC scrutiny, they must be prepared to respond to inquiries and allegations of both current and past conduct. For example, a company’s failure to register its ICO offering and participants’ subsequent sale and promotion of unregistered securities is a continuing violation of the law. As noted in several documents and publications by the SEC’s Division of Corporation Finance, “the staff’s views and suggestions in this public discourse are not binding.” The SEC’s securities registration requirements are contained in Section 5 of the Securities Act and do not have exceptions based on changes in the SEC’s priorities.

Similarly, while the SEC withdrew its guidance on custody in October 2024, the same guidance was replaced by a set of digital-asset broker-dealer FAQs and a request for public comment. This indicates that the SEC still views digital assets and token sales as matter within its scope of enforcement.

Individuals, companies, and financial institutions facing scrutiny from the SEC can also face enforcement actions regarding conduct from years ago. For example, while the SEC is pursuing enforcement against various entities for allegedly operating unregistered securities exchanges and offering unregistered securities, it is also pursuing other cases for similar conduct in the past. For instance, under Exchange Act Section 21(d)(9), the SEC can seek injunctions and officer and director bars relating to “a period of ten years preceding the date of the complaint” in certain cases.

What Happens After a Wells Notice in an ICO Case?

The issuance of a Wells notice is an important development in an SEC enforcement matter. It signifies that the SEC staff, which conducts inquiries and investigations, has made a decision to seek an enforcement action. However, a Wells notice is not a formal order or an adjudication of wrongdoing. Instead, it is simply a “notice of a staff recommendation.” While it does not specify whether the enforcement action will be commenced by filing a civil complaint in federal district court or seeking an administrative proceeding, it warns the recipient that the SEC staff may recommend enforcement action against the recipient.

When is a Wells Submission Due?

The SEC Enforcement Manual and other sources state that “an enforcement personnel’s Wells notice should give the proposed enforcement target a reasonable opportunity to file a Wells submission before a referral is made to the Commission.” While the specific deadline will be provided in the Wells notice, the SEC generally expects a party to file its Wells submission by the deadline specified in the notice.

Will a Wells Notice Lead to an Enforcement Action?

Not necessarily. While the SEC staff is interested in taking enforcement action after issuing a Wells notice, it still needs to obtain the SEC Commission’s authorization to proceed. The SEC Commission will review the SEC staff’s investigative file, and, if authorized, can issue a civil action or administrative proceeding.

What are the Possible Consequences of an SEC Enforcement Action?

Depending on the type of enforcement action at hand, the potential consequences of an SEC enforcement action range from financial liability for disgorgement of profits and civil penalties to permanent injunctions and industry bars. The possible consequences of an SEC enforcement action in civil proceedings can include:

• Injunctions;
• Disgorgement;
• Prejudgment interest on disgorgement; and,
• Civil penalties.

The SEC’s disgorgement authority is set out in Section 21(d)(7) of the Exchange Act, and Section 21(d)(8) sets the limitations period at five years, or ten years for scienter-based violations. The U.S. Supreme Court’s decision in Liu v. SEC separately limited the SEC’s authority to seek equitable disgorgement. Generally, the SEC can only seek equitable disgorgement for net profits that are then awarded as restitution to victims.

If a party is subject to a civil penalty, the relevant statute of limitations for disgorgement of profits is generally five years under 28 U.S.C. §2462. However, under Section 21(d)(8) of the Exchange Act, the SEC can seek disgorgement within 10 years of the latest violation when the claim arises from a scienter-based violation, such as a violation of Section 10(b) of the Exchange Act or Section 17(a)(1) of the Securities Act.

The possible consequences of an SEC enforcement action in administrative proceedings can include:

• Industry bars, such as those under Exchange Act Section 15(b)(6) for brokers and dealers;
• Cease and desist orders; and,
• Disclosures related to prior sanctions.

Are Appeals Possible in SEC Enforcement Actions?

Yes, but you will need to preserve your grounds for appeal during the proceedings below. While the SEC’s administrative proceedings have no appeal process, you can challenge an SEC administrative order by seeking review by a federal court of appeals. If you lose in federal district court, you can appeal to the appropriate circuit court of appeals.

Get Advice on Your Situation

If you want someone to look at the specifics of your case, Spodek Law Group handles federal criminal defense nationwide from New York and Los Angeles. The firm has been practicing since 1976 and its motto is simple: we owe loyalty to only you. Call 212-300-5196.