By Eom Yoon-ryung
Between February and May this year, Korean investigators conducted search and seizures at some of the leading cryptocurrency exchanges on suspicion of various charges. Recently the scope of the investigations has expanded to include companies that have held initial coin offerings (ICOs).
Unlike general regulatory procedures, in criminal procedure, investigative agencies (such as police and prosecutors) can exercise strong authority, such as search and seizure, summons and arrest by requesting a warrant.
Against the background of these searches and seizures, it is almost impossible to carry out an ICO, something primarily done by small businesses without strong legal teams. Therefore, it is important for companies wanting to launch an ICO to operate compliance from the early stages of the project. Let’s look at some of the typical acts that have been problematic in recent domestic prosecution investigations regarding ICOs.
Embezzlement, breach of trust and fraud
If the money raised through an ICO is used for personal purposes or not for investment purposes, embezzlement and breach of trust charges can be brought, and a person can be charged with fraud if it turns out that there are no relevant business entities. Although these are the most common type of charges leveled against businesses, business operators who lack experience in accounting management are often not aware of the risks.
Because the Korean Supreme Court recently recognized the property value for Bitcoin, investigations into ICOs are expected to focus primarily on embezzlement, breach of trust and fraud. It is essential to have a clear business entity and transparent accounting procedures.
Pyramid scheme, fund-raising business without permission
If, in the process of attracting more investors, an ICO operator tells potential buyers that the investment principal is guaranteed, that operator can be deemed to be running a fund-raising business without permission.
Furthermore, a business can be considered to be a pyramid scheme if it is structured in the form of rewarding participants for recruiting more people.
All such acts are prohibited domestically or subject to registration obligations, so one should be careful.
Giving bribes by breach of trust
ICO companies may pay a financial inducement to a particular exchange to have their token or coin listed, even if it does not meet the requirements of that particular exchange. In such cases, charges of giving bribe by breach of trust can be brought.
In addition to the above, in cases where the law is not yet explicit as regards cryptocurrencies and ICOs, any acts that are acceptable now might potentially be considered problematic later because of a different interpretation of the law.
If there are suspicions about the execution of an ICO in which billions of dollars are raised through a large number of participants, government investigators are highly likely to conduct intensive investigations into the parties involved or seize cell phone data, records of transactions by banks and cards, and all kinds of electronic data. In such circumstances, illegal activity will come to light in some way eventually.
Therefore, an ICO operator must conduct thorough compliance operations to preempt any eventuality. And, of course, good legal advice from a competent law firm is always a good idea.
Eom Yoon-ryung, a lawyer in the Tech & Comms, Criminal Litigation, and Criminal Defense practice groups, has handled various criminal cases relating to white-collar crime, trade secrets and corporate compliance.