SEC Obtains Freeze Order Re First “Decentralized Bank” and its ICO
Crypto currencies and Initial Coin Offerings or ICOs continue to be one of the most sought after investments even as regulators repeatedly caution investors, investigate offerings and bring fraud actions centered on crypto currencies. The CFTC recently issued a subpoena for information, for example, to virtual currency venue Bitfinex and Tether, a company that has a widely traded coin pegged to the dollar, according to recent news reports. Likewise, the SEC filed an enforcement action and obtained an asset freeze against a firm and its founders which raised hundreds of millions of dollars in a matter of weeks selling coins tied to claims that the firm was the first of its kind decentralized bank, offering a variety of banking services. SEC v. AriseBank, Civil Action No. 3:18-cv-00186 (N.D. Tx. Unsealed Jan. 29, 2018).
The action names as defendants AriseBank, an unincorporated entity based in Dallas, Texas, and its CEO Jared Rice, and COO Stanly Ford. AriseBank was founded by Defendants Rice and Ford in March 2017. In October 2017 the firm issued an “Elevator Whitepaper” – an abridged offering document – that described its products, leadership team and the AriseCoin ICO. AriseBank also offered a longer Developer Whitepaper in November and December of 2017.
AriseBank claims that the AriseCoin ICO is the largest ever launched. An initial private sale was completed in two days during November, raising $1 million. It was followed by a presale which supposedly raised over $400 million by December 26, 2017. The public sale began the same day the presale ended. It sought to raise up to $500 million by January 27, 2018. By January 18, AriseBank claimed to have raised $600 million. The coins could be purchased with U.S. dollars or a variety of virtual currencies.
A key feature of the claims was a so-called algorithmic trading application named alExchanger. It automatically made trades in various cryptocurrencies. AriseBank told investors that the trades would be made each day in customer accounts, generating profits. Those profits would be paid in eACO, a separate cryptocurrency that expired after a period. The expiration date was designed to force investors to spend it, activity that would supposedly drive value.
When soliciting investors three key claims were made. First, investors were told that the interests being purchased were not securities and that AriseBank was gearing up to fight the SEC. That claim is false, according to the complaint, which alleges that in fact the interests are securities which AriseBank failed to register as required.
Second, AriseBank claimed that it was acquiring a 100 year old bank and that it could offer customers FDIC insured accounts. In fact this was not true. The bank was not acquired and the FDCI was not insuring the accounts. To the contrary, the Texas Department of Banking issued an Order to Cease and Desist Activity on January 5, 2018, prohibiting Defendants and their affiliates from implying that they engaged in the business of banking in Texas.
Third, AriseBank claimed that it could offer an AriseBank branded VISA card that would permit customers to pay for goods and services using any of 700 different virtual currencies that they could hold in their AriseBank account. This was supposedly implemented through the services of Marqueta. Again the claim was false. Marqueta issued a cease and desist letter to AriseBank.
Finally, defendants failed to inform potential investors about the criminal history of Defendant Rice. Mr. Rice is currently on probation for felony theft and tampering with government records.
The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a)(2) and Section 10(b). The court entered a freeze order as to each Defendant and has appointed a receiver. The Commission is urging those who invested to contact the agency.