The Securities and Exchange Commission (SEC) announced it has issued a cease and desist order to Tomahawk Exploration and its principal David Laurance. The order bars the company from continuing to offer its virtual coin, the Tomahawkcoin (TOM), and orders Laurance to cease offering penny stocks and pay a $30,000 fine.
The violations stem from a scheme to raise $5 million, purportedly for an oil exploration project in Kern County, California. The SEC order says that the company claimed its Tomahawkcoins were linked to equity in the company's oil leases, and that token holders would potentially be able to profit from selling the tokens on the secondary market. In other words, "TOM tokens are securities."
But Tomahawk failed to register these securities. This will come as no surprise to anyone who followed the Tomahawkcoin project. A year ago, the company announced it was altering its plans specifically to skirt registration requirements. The company claimed that by ditching its plans to become a public company, it could avoid registration requirements and was "exempt from tough regulations imposed by the SEC."
The announcement even includes what appears to be a swipe at the regulatory body:
"SEC used to be a company that investigated fraud committed by Public companies, slowly the SEC has decided to become an entity that investigates companies for possible fraud. Yes,..we've come a long way, the SEC way."
Whatever exactly that means, it probably did not endear the company to the SEC.
It wasn't just lack of registration that got Tomahawk in trouble. It is also accused of fraud: Those oil leases that people were supposed to receive a share of might not have existed at all.
According to the SEC announcement:
"The SEC's order finds that the defendants' promotional materials used inflated projections of oil production that were contradicted by the company's own internal analysis and misleadingly suggested that Tomahawk possessed leases for drilling sites when it did not."
The misrepresentations didn't end there, apparently. The order also states that promotional materials for the project referred to Laurance and his co-conspirators as "refined, successful citizens with flawless backgrounds."
Laurance, in fact, has had previous trouble with the law as well as a string of bankruptcies behind him.
In 1993 he was convicted of lying to regulators and committing mail fraud in relation to a penny stock scheme. After leaving prison, he formed an oil and gas company, which soon also fell afoul of the law. In that instance, Laurance wasn't charged with a crime, though some of his colleagues were.
It appears Laurance only resorted to an ICO after failing to secure sufficient funding through private investment and capital markets. Tomahawk had been registered as an LLC in Nevada since 2010, years before the first ICOs occurred. Laurance only considered the possibility of an ICO after it was suggested to him by an early investor in the Kern County project who had contacted Laurance to complain about having lost his investment.
So the scheme, despite being dressed up in the language of the cryptospace, is really just old-fashioned securities fraud.
Robert Cohen, chief of the SEC Cyber Unit said:
"Investors should be alert to the risk of old-school frauds, like oil and gas schemes, masquerading as innovative blockchain-based ICOs."
Possibly the most striking part of the SEC announcement, however, is the claim that Tomahawkcoins failed to actually raise money. Instead, the coins were apparently distributed in exchange for promoting Tomahawk online.