Settlement establishes compensation fund for PlexCoin ICO investors

A U.S. District Court has approved a settlement between the Securities and Exchange Commission (SEC) and the directing minds behind the PlexCoin initial coin offering (ICO). Under the settlement, the defendants must pay almost US$7M in disgorgement, interest, and civil penalties, to be held in an investor compensation fund called a “Fair Fund”; frozen assets in the United States traceable to the PlexCoin ICO will be turned over to the SEC; and the defendants must relinquish any claims to PlexCoin-related assets frozen outside of the U.S. The SEC has stated in court filings that it expects that assets frozen both inside and outside the U.S. will be combined for eventual distribution to investors harmed by the PlexCoin ICO. The settlement appears to be the first time that Canadian or U.S. regulators have used an investor compensation fund or similar mechanism to compensate investors harmed by ICOs.

Background

PlexCoin has been the subject of regulatory action by both Canadian and U.S. regulators since 2017. In July 2017, the Québec Autorité des marchés financiers (AMF) obtained orders from the province’s Financial Markets Administrative Tribunal (FMAT) prohibiting the promotion of PlexCoin in the province, as well as freezing the funds and assets of PlexCoin’s principals. The AMF later obtained a court order appointing a temporary receiver to trace and collect assets received as part of the PlexCoin ICO.

In December 2017, the SEC commenced civil proceedings against PlexCoin’s principals in the U.S. District Court and obtained emergency orders to freeze assets in the U.S. PlexCoin’s principals subsequently brought motions to dismiss the SEC’s action for lack of personal jurisdiction, which were denied due to connections with the U.S., including the use of U.S. social media platforms to garner investor interest, as well as the participation of numerous U.S. investors in the ICO.

Most recently, in July 2019, the Québec Superior Court found one of the principals guilty of contempt of court for failing to produce certain documents and information within prescribed timeframes, including a sworn statement of assets and liabilities.

SEC settlement

In August 2019, the SEC and the defendants reached a tentative settlement, which was approved by the U.S. court on October 2, 2019. The court-approved settlement provides that:

• PlexCoin’s principals will pay US$4,563,469 in disgorgement, US$348,145 in pre-judgment interest, and civil penalties of US$1M each.
• Both principals are barred from participating in any offering of digital securities, and the primary directing mind is permanently barred from acting as an officer or director of any public company.
• Funds and digital assets frozen by the U.S. court’s December 2017 orders will be turned over to the SEC, to be applied against the penalties.
• The defendants agree to relinquish any claim to the frozen assets held by the Québec receiver and to co-operate with any collection efforts by the SEC against the assets held outside the U.S.
• The SEC will establish a Fair Fund for the civil penalties, disgorgement and interest, with the expectation that assets frozen in both jurisdictions will be combined for a single distribution to harmed investors under a plan overseen by the Québec receiver or another distribution agent.

Implications

In other ICO-related settlements, the issuer has either voluntarily returned all proceeds of the ICO, as in the Munchee [PDF] and SimplyVital [PDF] cases, or the issuer was required to administer a claims process, such as in the AirFox and Paragon Coin settlements. The PlexCoin settlement appears to be the first ICO settlement where the SEC or another North American regulator has established a Fair Fund or similar compensation scheme for harmed investors. This approach to investor compensation may become more frequently employed as regulators continue to take enforcement action against ICOs that have allegedly failed to comply with applicable securities law.