Mass. regulators take aggressive step against cryptocurrency offering

Bitcoin is one digital currency, and there is a proliferation of others.JACK GUEZ/AFP/Getty Images

Massachusetts Secretary of State William Galvin on Wednesday revealed aggressive steps against what’s known as an initial coin offering, arguing that one company’s approach to the novel, high-tech corporate fund-raising technique amounts to an illegal sale of securities.

Galvin’s office said it had filed administrative charges against the company Caviar, which is selling digital assets built on technology similar to that behind bitcoin.

The company has raised about $3.1 million since December by selling tokens that allow users to participate in an investment program focused on other similar cryptocurrencies and real-estate loans. The company has said token owners will be able to reap a portion of its investment gains. Galvin contends that this makes the investment a security.

The Cayman Islands company said it was not selling tokens to US residents, but Galvin said the company is still subject to oversight by his office because a majority partner, Kirill Bensonoff, lives in Brookline and has been working on the offering from Massachusetts.

Galvin said he is pursuing administrative charges against Bensonoff and Caviar, seeking a civil fine, an opportunity for any Massachusetts customers to get their money back, and an order that the company stop offering unregistered securities here.

“It’s not for me or my office to say that this is a good or a bad investment, but it is for us to say that if you’re offering this for investment in Massachusetts, we have to know who you are,” Galvin said in an interview. “We have to register the investment. We have to be aware of what it is.”

Bensonoff said in a statement that he is disappointed by the charges but hopes Caviar can address Galvin’s concerns.

“We certainly believe we haven’t misled or harmed anyone,” Bensonoff said.

Companies have collectively raised billions of dollars over the past year through the sale of cryptocurrencies based on block-chain technology, which is designed to minimize fraud by creating a secure record of each transaction.

Many cryptocurrency issuers argue that they are not securities because they have a practical use for their owners, for instance giving them the ability to access a product or service with their virtual tokens.

Galvin’s office, however, found that Caviar’s offering looked like a conventional, regulated investment, describing the sale as an effort “to finance the creation of a hedge fund.”

Speculation has been rampant in the cryptocurrency markets in recent months, fueled by interest on public exchanges, where people can trade their tokens for cash.

The investor enthusiasm has increased opportunities for companies to raise money with relatively little oversight, and authorities around the world have been rushing to catch up.

Still, much remains unclear about the legal status of the coin offerings, or ICOs. Though federal regulators have cracked down on a handful of offerings, the rules are murky.

Norm Champ, former director of the division of investment management at the US Securities and Exchange Commission, said he is not surprised to see Galvin’s office taking a stand given the absence of clarity at the federal level.

“I’m not smart enough to know where this is all going to end up, but I would like to see a coherent approach by the regulators,” said Champ, who is now a lecturer at Harvard Law School and a partner at Kirkland & Ellis LLP. “You’ve got to get everyone together so we can get to a rational regulatory approach.”

Caviar had hoped to sidestep the issue by avoiding US investors altogether. Its website in the United States shows a single paragraph of text, informing users that the token sale was not available here.

Galvin’s office, however, said the company is not doing enough to avoid taking the money of American investors. He said that advertisements for the token “were targeted to Americans on various social media platforms” and that there were ways to get around Caviar’s restriction.

In one instance, Galvin’s office alleges, a Massachusetts Securities Division investigator was able to participate in the sale using the name of a cartoon character and a picture of a passport that had been obtained through a Google search.

He said his office is investigating whether any residents actually bought the tokens.

“We obviously feel that Massachusetts residents were at risk,” he said. “That’s why we brought the action.”