SEC halts AriseBank ICO | Hacker News Reader

SEC halts AriseBank ICO

americanbanker.com

82 pointsrbanffy65 comments

For all those still unsure about running an ICO in the US:

> "The ICO is an illegal offering of securities because there is no registration filed or in effect with the SEC, nor is there an applicable exemption from registration," the complaint said.

The complaint was filed by the SEC in Dallas and the court ordered an emergency asset freeze of the company and it's two co-founders.

If you're considering an ICO, please attempt to understand your legal obligations and risks. The window of ICO free for alls looks like it's ending.

It’s the SEC, there was never a window, and they’ll claw back anything and everything they feel is out of bounds. People seem to sometimes confuse the slow pace of government with a lack of inevitability, and assume there’s an opportunity. It’s not an opportunity, it’s a trap.

I wouldn’t be surprised if a lot of, or all of the “legit” ICO’s are similarly removed from play.

Not sure if they can or will claw back anything. There are simply too many offenders to individually track down, prosecute, etc. Not saying they shouldn't be punished, but there simply are too many offenders. The small time offenders will probably be let off.

True, sometimes government does an ROI on offenders and only picks off the top 10% or top 50%, but still I'd be sweating if I ran an ICO.

Those offenders have helpfully immortalized their activities in an immutable public ledger. The SEC is going to have a field day, and the effort will be low. I suspect that the only measure of their interest will be total dollar amounts, beyond that... bang. I’m not sure how small you’d need to be when the nature of the activity itself produces cryptographically secure evidence of your activities. It may be that the directive to smaller ICOks will be something along the lines of, “Give it all back, now, or we’ll make you.”

Oh yes the SEC can absolutely claw back by applying laws in retrospective. Having too many offenders was never a problem for SEC.

Just because you ICO'd before today doesn't mean you are safe at all, in fact I'd argue the opposite-you've opened up yourself to unknown regulatory liabilities.

The SEC probably has about 5 employees working on ICOs, if that.

SEC's forays into ICO world caught public attention; it wouldn't surprise me if that number suddenly increased, very soon.

I have to agree, and it’s hard to imagine the SEC turning down a bunch of easy wins. The SEC is has internal politics just like any large group.

I wouldn't be so sure. In the article linked they mention that J. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission, stated "The SEC is devoting a significant portion of its resources to the ICO market..." just a few days ago.

There's nothing that prevents them from assigning 50 employees starting from year 2020 to mop up every ICO offered up until now. And they won't only going for the companies, but against the founders / CxOs individually - it's a poor consolation if you're not getting criminal charges because they haven't looked at your case yet, since they have quite a few years to do so.

There is no way to stop the ICO phenomenon. The genie is out.

And we should be grateful. Prejudicial judgements banning entire categories of economic collaboration are destructive to humanity.

If an SEC rep sees this, I’m happy to contribute towards an effort to systemize the discovery and prosecution of ICO founders in violation of SEC regs and who are within reach of US authority (leaning on the Internet Archive and other verified data sources for e-discovery).

I wanted to get clarificaton from the SEC and contacted them here: https://www.sec.gov/forms/corp_fin_interpretive

Mark Vilardo ended up calling me, the same guy I read about here: https://hackernoon.com/the-sec-called-about-our-ico-i-answer...

He was super friendly but basically left no window open for a legal ICO in the US outside of somehow ensuring that your token will never go up or down in price.

EDIT: No option for a legal ICO... UNLESS you register with the SEC as a security, which is very expensive and subjects you to strict regulations.

> basically left no window open for a legal ICO in the US

This is at odds with Andrew Chapin's description of his call with Vilardo, where he understood him to be saying:

> "the SEC recognizes that not all ICO events or token issuances are securities."[1]

It seems like the SEC can't reasonably hold both positions, unless one means literally the only legal ICOs guarantee no change in token value.

Having said that, it does seem like the more restricted interpretation is more in line with the Howey test.

[1] https://hackernoon.com/the-sec-called-about-our-ico-i-answer...

Agreed that publicly there are mixed messages, but based on my phone conversation, the tone was basically, "If we want to get you, we will." because the Howey test is pretty restrictive against ICOs. Additionally, they cautioned that even if the SEC passes on regulating, states have their own securities laws which can be enforced and sometimes have different rules than the Howey test.

It's a legal minefield and unfortunately those brave enough to cross it and slip through will get a lot of money and those that try and get caught will get stiff penalties. It really would help to get more clarity in the SEC's public comments.

Exactly. I used to work in the securities regulation world and you'll be surprised at how long some investigations take - I've been involved with cases that went on for TEN years.

The SEC will take the position that the vast majority of ICOs were unregistered offering of securities. Just because they don't act today, doesn't mean they're not actively investigating. And they will go after the ICO offerers.

You missed the "nor is there an applicable exemption from registration"

It's been well known since early-December when the SEC shut down the Munchee ICO that ICOs that function as securities will not be allowed. There are many ICOs that are still fine.

Correction. ICOs that function as securities and are not running under Reg D 506(c) and/or Reg S (for non-US investors) are not allowed.

ICO's aren't securities. Cyrptocurrencies aren't investment platforms.

Some people are attempting to con investors into believing they are, but they do not represent equity, or legal rights of any kind.

You get into trouble if you market your ICO as a security, or promise capital gains. Issuing tokens by itself is not subject to SEC scrutiny.

> AriseBank announced Thursday it was correcting an announcement made the prior week about the acquisition of an FDIC-insured bank.

Wow, I checked the links to find this. First [1] they claimed:

> AriseBank now holds 100 percent of the equity in both KFMC Bank Holding Company, a 100 year-old commercial bank, and TPBG, a 25 year-old investment banking and management firm.

> As part of this acquisition, AriseBank can now offer its customers FDIC-insured accounts and transactions, and gain a strong backing for crypto aTMs™ which will grant consumers to easily convert and withdraw cryptocurrencies in U.S. Dollars.

Then a week later they "corrected" [2] the announcement:

> Because of the decentralized nature of the AriseBank software, it is wholly unnecessary for the platform to be FDIC regulated or insured as the individual users maintain full control of their funds. The company is currently in the process of acquiring two U.S.-based companies, KFMC Bank Holding Company and TPMG. KFMC Bank Holding Company is the owner of a 100-year old US commercial bank and TPMG is a 25-year old investment bank. The name of the actual FDIC-insured bank being acquired will be announced once all paperwork has been filed with the FDIC and regulators have approved its status.

This really getting out of hand.

[1]https://www.prnewswire.com/news-releases/arisebank-announces...

[2]https://www.prnewswire.com/news-releases/arisebank-announces...

Yes! AriseBank blatantly lies in the first statement about FDIC-insured accounts. Here is another quote from the "correction":

> This entity is totally separate from AriseBank and will operate separately from AriseBank. AriseBank will never offer FDIC-insured accounts to our users, as this is not possible with a decentralized software.

Much longer article: https://www.americanbanker.com/news/arisebank-raises-questio...

Founder of AriseBank: "We're just a bunch of genius programmers who are trying to change the world."

ICO founders all seem to be a mix of greed and hubris.

99 parts greed, one part hubris, to be precise.

The SEC further said in its complaint that AriseBank “omitted to disclose the criminal background of key executives — most notably, Rice, who is currently on probation for felony theft and tampering with government records."

Seems there is something extra that the founder is forgetting to mention - something that makes him not eligible to found anything bank-related.

From the American Banker article:

FBI and SEC agents stormed AriseBank’s office in the middle of the night where the team had been sleeping after a long night spent coding.

"I got woke up with guns pointed at me," he said. "It was, 'Put your hands up where we can see them.' I didn't know why they were there. They brought us outside, handcuffed us, and put us in a Suburban in the driveway."

Upshot:

If you break the law to disrupt the taxi industry, expect some lawsuits.

But if you break the law to disrupt the financial system, expect to see the business end of the state's monopoly on violence.

> But if you break the law to disrupt the financial system

That's quite the generous description of this $600 million scam operation that was apparently completely full of shit from day one.

I mean Uber does some shady things, but it's not a scam.

> completely full of shit from day one

The CNBC and American Banker articles don't read like completely full of shit.

The company's crimes consist of not registering with the SEC, the FDIC or the Texas banking regulator and putting the word "bank" in their name which is against the law if they're not a registered bank. They also lied in press releases.

I wouldn't trust my money with these guys, but I'd say their crimes are roughly equivalent to Uber systematically misleading regulators and law enforcement, ignoring laws in countless cities and countries, criminal bribery, theft of intellectual property, etc.

The point is that firearms didn't get aimed at Uber employees, but when you challenge banks you get night raids, loaded weapons and black Suburbans.

Federal level enforcement vs municipal perhaps. Not sure it really has anything to do with banks in particular when all kinds of federal law enforcement agencies act in the same militarized manner.

Ok, we've changed to that from https://www.cnbc.com/2018/01/30/sec-halts-one-of-the-largest.... Thanks!

   Rice responded through a letter
   Posted on Steemit that AriseBank
   Refuses to comply with the Texas 
   Commissioner’s order and will
   not remove the word “bank”
   from its name. He argues that
   the AriseBank software is
   decentralized, not under the 
   Control of AriseBank, and
   Therefore not subject to bank
   regulation.

In Russia parents teach kids that you can never play "find the clever technicality" with the government, because you will always lose. I guess in America they don't teach kids that lesson?

I guess that's a testament to the faith of US citizens in the rule of law / their government following the rules they themselves set up. Being able to have such faith is a good thing in general, but it doesn't excuse stupidity. As for Russia, their government is a bit more "move fast and break things", I would guess.

I think it is more that in the rest of the world people understand the purpose of the law, and do not get hung up on the words, whereas in the USA people look at the words very carefully and try to find some way around the specific wording of the laws.

A law stating, for example, "no man shall shoot a gun at another" will clearly mean "you cannot shoot anyone" in the rest of the world, whereas in USA you can expect lawsuits seeking the court's definition of "shoot", "gun" and "man". Why? Because it does work that way often in USA.

Same in this case. I imagine a good lawyer might be able to find a way in which AriseBank really was "not really IN texas" and in fact was "not REALLY a bank"

That sounds about right, too. I guess I was describing the "how one expects the government will behave" angle. My personal impression is that USGOV would happily take the bait and end up tied in court over the definitions of "shoot", "gun" and "man", most of the time. This is not one of those times, though.

(And to be clear, with Russians, I meant a quick "yup, we didn't word this precisely enough, but both of us know what we meant there", followed by jail time.)

> In Russia parents teach kids that you can never play "find the clever technicality" with the government, because you will always lose.

In America, the system of jurisprudence is adverserial[1] -- in Russia (and most of Europe), it's inquisitional[2]. This means that the court's only interest is in applying the law as written, not investigating any facts of the case. This distinction is why, in America, you can "win" vs. the government on technicalities.

[1] https://en.wikipedia.org/wiki/Adversarial_system

[2] https://en.wikipedia.org/wiki/Inquisitorial_system

In the Netherlands we have no jury system.

Its your smart lawyers vs. the governments smart prosecutors and at the end of the day 3 smart judges decide. Exceedingly boring and technical.

Meanwhile in the US it is a circus. Literally anything can and will happen. This leads to people taking risks.

Can anyone access their website [1] or whitepaper [2]?

It is incredibly scary that such a huge ICO can disappear from the internet. Imagine if another company that was raising $600 million just disappears from the web.

[1] http://arisebank.com/

[2] https://www.arisebank.com/wp-content/uploads/2017/12/elevato...

The 100-page developer whitepaper is still available in Google's cache.

https://webcache.googleusercontent.com/search?q=cache:F7TfYD...

> https://file.io/kQ2cqm

{"success":false,"error":404,"message":"Not Found"}

Looks like file.io deletes the file after it's downloaded once.

Here's a link good for 24 hours https://dropfile.to/JBt2vu7

The assets include Dogecoin.

We all died in 2000 when the end of the world came. This is a parody timeline, sort of like when shows go on for too many seasons and hack writers take over.

It's like someone did this on purpose to surprise Robert Frost (he favors fire).

"Some say the world will end in fire, Some say in ICO." ?

You just made me seriously wonder if we're not living in a Black Mirror-like simulation of the world, run by a bored programmer who feels a growing urge to turn the whole thing into a big joke.

and the never ending long list of ICOs https://www.coingecko.com/en/ico

Good to see the separating of low quality scam ICOs from legitimate ones.

I'm not trying to start anything here. What are some examples of clearly legitimate ICOs?

Does Ponzicoin count?

http://ponzicoin.co/home.html

fraudulent? no. legal? no. legitimate? depends on your definition.

Also, it was apparently just a joke that got out of hand, bc it's ridiculously easy to build a POC for your "joke."

One of the first ICOs, Ethereum, run by the Ethereum Foundation in Switzerland, has successfully created a platform to run ICOs. It is legitimate so long as there is at least 1 Ethereum-based ICO that leads to a useful product.

And if there aren't any, it's like a meta ponzi scheme.

I'm optimistic that there's surely something practical out there.

For something practical, I’d look at Bitcoin. It seems to be somewhat useful for routing payments around regulation. Even at that, though, it currently isn’t very good due to how inefficient the blockchain is. Maybe non-blockchain technologies like the Lightning Network will help... but if you can’t even create a successful payment network with a blockchain, I don’t see any reason to be optimistic, given that no other use cases have shown any hint of success.

> It is legitimate so long as there is at least 1 Ethereum-based ICO that leads to a useful product.

Not a legal standard. They took money from non-accredited investors in the U.S. and didn't do KYC/AML. It really isn't that complicated.

My first thought was CryptoKitties. It might be a kind of game, but there's nothing wrong with that. It's not like blockchains are proving all that useful for anything else...

Is anyone actually playing? I thought that was like a short-term gimmick where people were trading cats but there is no actual game. I don’t know if I’d call it a successful use case just yet, but rather I would wait at least a year or two to see how such experiments play out before making a call.

I'm not sure about ICO's. They're pretty wantonly carried out.

However Ethereum as a technology and platform has been making the odd inroads. The UN previously used it successfully in a project to help maintain ID's for refugees and dispersion of aid a few years ago.

Canada's currently experimenting with using it for tracking dispersion of funding and grants by the National Research Council[0] as well as experimenting with the same digital ID's (via Accenture/Microsoft) for air travel.[1]

[0] NRC Website: https://www.nrc-cnrc.gc.ca/eng/stories/2018/blockchains.html

[0] Overview article: https://globalnews.ca/news/3977745/ethereum-blockchain-canad...

[0] NRC Working Prototype: https://nrc-cnrc.explorecatena.com/en

[1] https://globalnews.ca/news/3991496/known-traveller-digital-i...

Kik filed with the SEC before doing theirs last year.

https://www.sec.gov/Archives/edgar/data/1574601/000157460117...

>The SEC said that for the first time in connection to an ICO fraud, it has appointed a third-party custodian, or receiver, to secure the firm's cryptocurrency holdings. Those assets include bitcoin, litecoin, bitshares, dogecoin and bitUSD.

How exactly do they plan to do that? Are they raiding machines for passwords/private keys as a part of asset freezing?

Most people aren’t crazy, stupid, or brave enough to defy court orders indefinitely.

They can move the cryptocurrencies out and claim they got hacked. How do you prove they know the password/private key to a new wallet address that isn't tied to any exchange identity/background check?

Subpeana everything. The government has a lot of power and a long arm, and a few centuries of experience hunting down money trails.

It would take balls to do this while facing a risk of a prison sentence. As 'IntronExon wrote, "most people aren’t crazy, stupid, or brave enough to defy court orders indefinitely".

In the same way as with physically hidden (e.g. buried) loot. One way to do that is to monitor you and your contacts until someone attempts to spend any of that wealth, and then put them in jail for that.

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