A New Precedent: FINRA Charges Crypto Broker With Securities Fraud

The Financial Industry Regulatory Authority (FINRA), a non-profit watchdog for public brokerage firms in the U.S., has had its first run-in with the cryptocurrency industry. The self-regulatory organization is filing a complaint against a Massachusetts man for “the unlawful distribution of an unregistered cryptocurrency security called HempCoin.”

Timothy Tilton Ayre, FINRA alleges, illegally associated sales in his publicly traded company, Rocky Mountain Ayre Inc. (RMTN), with the marijuana industry token. Allegedly purchasing the rights to HempCoin in June of 2015, Ayre rebranded the coin as an RMNT-backed security, FINRA’s complaint states.

According to FINRA, Ayre attempted to market his “worthless” company and sell shares through HempCoin by advertising the cryptocurrency as “the first minable coin backed by marketable securities.” Heralding HempCoin as “the world’s first currency to represent equity ownership” in a public company, Ayre reportedly guaranteed that each token represented 0.10 shares in RMTN.

Since Ayre never registered HempCoin with the SEC, FINRA is charging him with “unlawful distribution of an unregistered security.” Moreover, the self-regulatory body accuses Ayre of defrauding investors “by making materially false statements and omissions regarding the nature of RMTN’s business, failing to disclose his creation and unlawful distribution of HempCoin, and making multiple false and misleading statements in RMTN’s financial statements.”

FINRA explains in its statement that the filing does not constitute legal action. As “an initiation of a formal proceeding,” Ayre can respond to the filing by requesting a formal disciplinary hearing. In the event that Ayre’s defense doesn’t hold up and he’s found guilty, he could be fined, censured, suspended or barred from the securities industry; relieved of his gains; and/or forced to pay reparations to investors.

The filing is the first action taken by a self-regulatory industry against an individual involved in the cryptocurrency industry, and it’s the first time FINRA has engaged with a securities dispute directly relating to the cryptocurrency market.

That said, formal regulators have wrestled with the unregistered sale of securities before, even outright scams. Both FINRA and the SEC’s reckoning with token projects and the sometimes unscrupulous actors who promote them continues to insert itself into the debate on the distinction between utility/security tokens and the merit of cryptocurrency regulations.