Professor Ann Lipton recently wrote about an ingenious scheme developed by the Federal Bureau of Investigation that has resulted in indictments of 18 individuals and entities for alleged fraud and manipulation in the crypto currency markets. According to the Securities and Exchange Commission, which also filed civil complaints, the FBI directed the creation of a crypto asset, named NexfundAI, along with related promotional materials on a publicly available website. The FBI did so as part of an undercover investigation into crypto asset market manipulation. The FBI wanted to clearly establish that the crypto asset was a security under the "investment contract" definition created by the U.S. Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). 

Importantly, the SEC alleges that NexfundAI was offered and sold to the public on a crypto trading platform. For me, this raises some interesting questions. 

The SEC clearly believes, and has alleged in filings in federal court, that NexfundAI is a security. I did not find evidence of an effective registration statement for NexfundAI on EDGAR. The government might take the position that NexfundAI is exempt under Section 3(a)(2). However, it does not appear that NexfundAI is a security issued or guaranteed by the United States. Section 3(a)(2) also exempts securities issued by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States). Was the FBI acting pursuant to authority granted by the U.S. Congress?

Another question is what about the public who invested in NexfundAI? The FBI is asking persons who bought or sold to complete this form, but does not commit to providing any restitution.

Finally, one wonders whether the active participation of the FBI in creating NexfundAI will provide those charged with a defense. This is a question that I raised over a decade ago in another securities law prosecution in which the FBI was an active participant.