When you run a business, it is important to take legislation or legal matters into account seriously.
Getting the wrong professional advice could be expensive, even though you may be paying what seems to be a relatively small amount.
For example, look at what a Malaysian Tech Lawyer shared over his social media article.
U.S. Law Firm Sued for Wrongful Advice on Cryptocurrency
On the 2020 new year eve, a cryptocurrency investment fund firm, Crypto Asset Fund LLC (together with other Plaintiffs – Digital Capital Management and Timothy Enneking) has initiated a legal suit against a U.S. law firm namely Faegre Baker Daniels for providing wrong legal advice on the establishment of a cryptocurrency investment fund.
In the aforesaid cryptocurrency investment fund, it was said that Digital Capital Management has raised more than $3.6 million from different investors in the States.
The U.S. Securities and Exchange Commission (SEC) procured an enforcement action against all the Plaintiffs in 2018, among others, that the company has failed to properly register as an investment company.
From the Order issued by the SEC, the SEC found that:
- Crypto Asset Management (CAM) has failed to register as an investment company;
- CAM did not file a registration statement with the SEC
- No exemption from registration was available for CAM at that time;
- CAM misrepresented to the public that the investment fund was a regulated fund.
Therefore, in the legal suit brought by CAM against the law firm, CAM alleged that it had been advised that:
- the funds should be offered under Regulation D via Rule 506(b) as opposed to Rule 506(c);
- need not to register the company as investment company;
- the investment fund was not securities.
What is Rule 506(b) and Rule 506(c) under Regulation D?
In general, Rule 506 of Regulation D provides exemptions from registration for companies that offer and sell securities. However, such companies must file relevant notice with the SEC after they first sell their securities.
Under Rule 506(b) which is known as the “Safe Harbour” provision, a company may sell securities to unlimited number of accredited investors and up to 35 other purchasers. However, the company cannot conduct general solicitation or advertising to market the securities.
In contrast, those companies that seek to be exempted under Rule 506(c) could carry out general solicitation and advertising to sell the securities but nevertheless the company may only sell the securities to accredited investors.
Therefore in September 2018, CAM paid a $200,000 penalty to settle the SEC’s claim which resulted in the current suit against the law firm.
