As SEC Takes Aim at ICO Market, Will Courts Turn to Receiverships?

Jones Day’s Mark Rasmussen discusses the SEC’s first ICO enforcement action where a receiver was appointed.

CCBJ: How did you get involved in receivership work and, in particular, the AriseBank receivership, which is the first in an SEC enforcement action involving an ICO promoter?

Mark Rasmussen: I’ve been researching cryptocurrencies and blockchain for the last few years as part of my firm’s initiative to be on top of new technologies that might have an impact on our clients. I’ve been writing, speaking and working with clients on blockchain-related legal issues.

When the SEC’s regional office in Fort Worth was preparing to bring a case against an entity and individual based in Dallas who were doing an ICO, they thought a receiver would be helpful because most of the assets were cryptocurrency. They wanted a Dallas-based attorney familiar with cryptocurrencies. Thanks to our office’s strong relationship with the Ft. Worth Regional Office, they came to us and ultimately to me to ask if we would submit a proposal. The SEC develops a list of candidates and makes a recommendation to the court. In this case, the chief judge of the Northern District of Texas, who is handling the SEC’s litigation, appointed me and allowed me to hire Jones Day as my counsel.

What's the role of a receiver?

A receiver is a third-party neutral custodian for the defendants’ property and is granted powers by the court. Receivers owe a fiduciary duty to stakeholders and the court in regard to the receivership property. The primary duties are to identify, locate, secure and manage the assets of the receivership entities. Depending on how the litigation plays out, the receiver may liquidate the assets and develop a process to return money to investors. In this case, the primary job of the receiver is to secure the assets, which were cryptocurrencies, and oversee them while the SEC litigates its case.

What is an Initial Coin Offering, or ICO, and why have they received so much press attention?

It’s a relatively new form of raising money by selling a new cryptocurrency to people who want to contribute to a company, or who want to use the cryptocurrency in some fashion. ICOs are sometimes called token sales. The market for ICOs grew incredibly in 2017 and is continuing into 2018. A substantial amount was raised in 2016 – hundreds of millions – but that’s paltry compared to the $5 or $6 billion raised through ICOs last year. In the first quarter of this year, we've seen another $5 or $6 billion raised. People are capitalizing on the interest in bitcoin and developing alternative cryptographic coins and tokens that serve all sorts of different purposes.

A crypto token or cryptocurrency can have any number of rights associated with it. The SEC and state securities regulators have been looking closely at them, arguing that many of them are securities. And a number of enforcement actions have been brought by those and other regulators.

Why all the press interest?

Two reasons that I can see. First, there's been a huge amount of money raised and a lot of investor interest because people who didn't catch the bitcoin rising tide are looking to get in early on alternative coins and make some money. Second, the regulators are seeing what they perceive to be a lot of fraud and are bringing many enforcement actions, which I don't expect to die down anytime soon.

What's the difference in being a receiver for an ICO matter versus other assets?

One big difference is how quickly the assets can be moved. For example, in a receivership with bank accounts, the SEC typically gets the court to issue an asset freeze and the banks freeze the assets relatively quickly and the assets cannot be moved. If an entity has real estate or cars, that stuff is hard to move and hard to hide.

In contrast, a cryptocurrency can be moved, with just a few strokes of the keyboard, to an account controlled by someone anywhere across the globe. That may be someone who can’t be served with legal process or who would not be subject to U.S. courts’ jurisdiction. It's important in these cases to move quickly, identify where the cryptocurrency is stored, and transfer it out very fast.

What made the receiver a key role in this case?

The SEC was probably aware that most of the assets were in cryptocurrencies and recognized that having a receiver who could take possession of those cryptocurrencies from day one would be helpful. Receivers are most advantageous when there is concern that the defendants are going to waste assets or move them out of control of the U.S. courts.

Jones Day is serving as legal counsel to the receiver. What's involved with that?

Jones Day was ideally positioned for this particular receivership. In all matters, we take a very collaborative approach that’s consistent with our One Firm Worldwide motto. There were assets overseas, and we needed lawyers around the globe on the first day to help secure them. We have lawyers with investigative backgrounds – including former prosecutors – who were deployed to talk with the companies that had been service providers to AriseBank, get their cooperation and secure those assets. My colleagues here in Dallas, including Jim Cox and Jay Johnson, worked with me on day one to transfer the cryptocurrencies and secure other assets. Since then, they have been helping me issue subpoenas, develop litigation strategy against third parties, and file suit to pursue assets that we believe are part of the receivership but that we don't yet have control of.

Once you’ve uncovered and secured assets, what remains to be done?

We have to finish litigating against a couple of third-party individuals. It’s just started. The defendants haven't answered. There may be other lawsuits we need to bring, and we’re continuing to trace proceeds of the ICO to see if there are other assets we’ll need to pursue. At some point, we'll need to come up with a plan to liquidate the assets.

If the SEC prevails in its lawsuit, or there's a settlement with one or both of the defendants, we will likely have a claims process, which will need to be approved by the court, and we’ll ask the contributors to the AriseBank ICO to submit evidence of their contribution. We'll validate that, and for allowed claims, we'll return their share of the contribution, less certain fees and expenses incurred as part of the receivership.

What should contributors to the AriseBank ICO know and where can they get information?

They should know that the SEC's case will take some time. Sometimes these cases settle relatively early. Sometimes they go to trial, which can take many months or even a year or more. The investors should pay close attention to the website we created to keep them informed ( All important information about the status of the receivership is posted there.

Do you anticipate more receiverships in cases similar to this one?

Ultimately, it's up to the SEC and the courts to decide, but I would expect so. Having a receiver on the ground from day one makes a lot of sense in cases involving cryptocurrencies. You want a receiver familiar with cryptocurrencies and how they're stored and transferred. They can get technical experts to work with them. We are working with Kroll, and they've been a good partner.

Mark Rasmussen is a seasoned litigator and investigator with more than a dozen years of experience. He advises clients on regulatory compliance related to cryptocurrencies, initial coin offerings (ICOs), and blockchain technology and was recently appointed to be the first ever receiver in an SEC enforcement action involving an ICO promoter. Reach him at [email protected].

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