The U.S. Securities and Exchange Commission (SEC) has charged a so-called DeFi company for allegedly conducting a fraudulent $30 million offering involving digital assets.
The SEC alleges that the company, based in Singapore, has violated securities laws by not registering its offering with the Commission or qualifying for an exemption from the registration requirements of the federal securities laws.
This article will provide an overview of the SEC’s charge and the details of the alleged fraud.
Overview of the SEC charges
On August 26, 2020, the U.S. The Securities and Exchange Commission (SEC) charged four individuals and one company, Block.one, with conducting an allegedly fraudulent $30 million initial digital offering (IDO) of digital assets. According to the SEC’s complaint, Block.one offered and sold unregistered digital security tokens through an online crowdfunding platform called EOSIO Launch – a so-called “Decentralized Finance” (DeFi) company – to nearly 3,000 investors in the U.S., raising approximately $30 million of proceeds by May 2018.
The SEC alleged that within 10 months of its launch, the SEC identified violations amounting to false and misleading statements in the offering materials; violations related to Block.one’s failure to file a registration statement with the Commission; unlawful transfers of securities; acting as unregistered brokers; acting as an unregistered broker-dealer agent for purchasers of EOS-derived securities; acting as a de facto underwriter without properly registering with this status with the Commission; distributing unreasonably high commission payments for assisting purchasers of securities from Block.one; providing misleading information regarding potential profitability from investing in EOS; and using deceptive marketing practices regarding the use of funds raised through its IDO.
The SEC also alleged that Block.One violated Regulation S under Section 5(d) of the Securities Act by providing investors with false and misleading statements on its website describing their investments as “all or mostly liquid investments” when they weren’t liquid investments at all due to prevailing market conditions associated with crypto transactions at that time in May 2018.
In particular, Block One represented that it had no intention or plan to list any digital assets acquired through its IDO on a cryptocurrency exchange or publicly traded exchange unless certain criteria were met – but only listed some assets on exchanges after issuing IDOs without proactively notifying investors about these listings or any changes in material facts concerning those assets acquired through their investments into those offerings when such changes should have been disclosed under prominent regulations about public corporate disclosure requirements dealing with material information about investment prospects for public companies like blockchains engaged in public stock exchanges such as cryptocurrency exchanges/trading site offerings registered within countries including United States amongst other regions/jurisdictions worldwide established (or soon happening).
Background on the company and its alleged fraudulent activities
On May 20, 2021, the United States Securities and Exchange Commission (SEC) charged so-called decentralized finance (DeFi) company Quartet Financial Inc. with defrauding investors in a $30 million securities offering. Quartet Financial is a Delaware Corporation that promised to develop automated financial products on its blockchain network and to make them available to investors online.
The SEC investigation found that the company defrauded its investors by featuring fake testimonials and touting false business relationships with major companies such as Goldman Sachs and JP Morgan Chase to induce investors into purchasing their securities.
The SEC alleged that Quartet Financial also used deceptive tactics such as fabricating business relationships with leading financial institutions, falsely claiming its products were “fully functional” when they had not yet launched, and circulating false marketing material featuring fictitious testimonials from supposedly satisfied customers.
In addition to these fraudulent activities, the SEC investigation uncovered that Quartet Financial provided false information concerning the amount of money it had raised from its offering, failed to accurately disclose restrictions on transfers of securities it sold to investors, failed to file a registration statement for its offering with the SEC as required by federal law, and sold unregistered securities for income without registering with federal regulators.
SEC Charges So-Called DeFi Company for Allegedly Fraudulent $30M Offering
The U.S. Securities and Exchange Commission (SEC) recently charged a so-called DeFi company with conducting a fraudulent $30M offering. The SEC alleges that the company failed to register the offering under the federal securities laws, misled investors about its business operations, and misrepresented its team and development timeline.
The SEC seeks to impose penalties on the company and disgorgement of ill-gotten gains, if any. Read on to find out more details about the allegations against the company.
Unregistered securities offering
The Securities and Exchange Commission charged a so-called decentralized finance (DeFi) company and its founder with fraud after allegedly raising $30 million in an unregistered securities offering. The SEC alleges that the company, Stacks, Inc., offered investors tokenized securities known as “Stacks tokens” that were marketed for trading on the secondary market before being approved by the agency.
According to the complaint, Stacks misled investors into believing the tokens had been registered with the SEC when, in fact, they had not been. The offering was also not available to all investors but only to a select group of accredited or well-funded investors.
The SEC also claims that Stacks knowingly made false and misleading statements about its business operations and operations of its affiliates to induce potential purchasers or prospective buyers of Stacks tokens into investing. Furthermore, the company allegedly sought to conceal information from investors concerning its financial performance during certain periods and liquidity issues concerning Stacks tokens traded on certain exchanges.
Investors should be cautious before investing in any product considered unregistered by the SEC or any other regulatory body. In addition, potential buyers should thoroughly analyze any statements made by entities about their ability to trade unregistered securities before making an investment decision.
Misrepresentations to investors
The Securities and Exchange Commission (SEC) has charged a so-called “DeFi” (decentralized finance) company and its executive, with multiple violations of federal securities laws in connection with the company’s offer and sale of approximately $30 million in digital asset securities to investors. According to the SEC’s complaint, the defendants allegedly misrepresented to investors material details about their business operations, revenues, sources of revenue and movement of investor funds.
The SEC found that the defendants allegedly misled investors by claiming that the company was making money from providing DeFi services such as smart contract trading, asset lending, yield enhancement farming, and synthetic assets when it was not making any revenue from those activities. Instead of using investor funds as represented, they moved them into investments unrelated to their operations while charging fees for non-existent services.
In addition, the SEC alleges that the defendants spent significant amounts of investor funds on personal items such as luxury cars without disclosing these expenses to investors. The complaint further alleges that when asked about certain costs charged against certain investments made by an investor group known for raising red flags about fraudulent activity in digital asset offerings, one executive admitted the costs were “non-applicable” but neglected to inform other investors or disclose that fact on their offering materials or website.
The defendants also allegedly failed to provide adequate disclosures related to their company’s financial information, such as unaudited financial statements, while still attempting to solicit investments using language indicating they had vetted potential partners before investing. Furthermore, despite public assertions regarding their safety protocols, including multi-signature wallets used for custodial services requiring two secure signatures before releasing funds, the SEC found that they implemented no such measures nor disclosed anywhere on their offering material or website prior investing.
If proven true, these actions would constitute violations of Sections 5(a), 5(c), 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933 as well as Sections 10(b) and 15(a) under the Securities Exchange Act of 1934.
Misappropriation of investor funds
The U.S. Securities and Exchange Commission (SEC) has charged a so-called Decentralized Finance (DeFi) company for allegedly misappropriating investors’ funds in a $30 million token offering.
The SEC’s complaint alleges that the defendants, including two corporate entities and two people associated with them, engaged in a fraudulent scheme to induce investor purchases of their tokens by falsely claiming that the offering was approved by the SEC and other regulatory bodies. The complaint further alleges that the defendants sought to conceal the true nature of their fraud. They misused investor funds for other investment opportunities instead of developing their DeFi protocol as promised.
The two individuals, nine entities operating as one group, and another affiliate were charged with violating federal securities laws by selling unregistered digital assets without adequately disclosing their offering or business activities. In addition, the defendants are accused of issuing false statements or omissions regarding the regulatory compliance of their digital asset offerings, failing to disclose material facts about related private placement transactions, misappropriating millions of dollars in investor funds, using investor proceeds to finance other ventures unrelated to DeFi protocol development, and creating false documents concerning transfers between related corporate accounts.
The SEC investigates whether other individuals or entities have been involved in this fraudulent scheme.
The SEC’s Response
The Securities and Exchange Commission (SEC) is acting against a so-called decentralized finance (DeFi) company for allegedly fraudulently raising $30 million in an unregistered securities offering.
The SEC has charged the DeFi company and its four executives with violating federal securities laws and is seeking disgorgement of funds plus penalties and interest.
Let’s take a closer look at the SEC’s response.
Filing of a civil complaint
On December 18, 2020, the U.S. Securities and Exchange Commission (SEC) announced that it has filed a civil complaint against two companies and their founder for allegedly offering a fraudulent $30 million digital token offering in violation of the federal securities laws.
According to the SEC’s complaint, filed in the U.S. District Court for the Central District of California, defendants DeFi Technologies LLC (DeFi Tech) and BLVQ LLC (BLVQ), as well as their founder John Shallcross, sold “LAToken” digital tokens after falsely claiming they had already conducted various “test transactions” with over 40 parties, when in truth they had not done so.
The SEC alleges that instead of investing Latoken proceeds into investments related to DeFi Tech as promised investors, Shallcross diverted a substantial amount of LAtokens for personal use, spending them on restaurants, hotels, travel expenses and rent payments. The SEC is seeking permanent injunctions prohibiting future violations by defendants of federal securities laws and disgorgement plus interest from all defendants. The case is pending before the court for further proceedings.
Asset freeze
The U.S. Securities and Exchange Commission (SEC) has charged a so-called decentralized financial services company with illegally offering and selling over $30 million in digital securities to investors in the United States and overseas. The SEC obtained an asset freeze against the company as part of its response.
The SEC’s complaint alleges that Austin-based Erica Financial Inc., or EFIN, was not registered as a broker-dealer or registered to offer or sell digital securities under state law. It operated without license from the SEC or relevant state regulators.
The SEC’s order further details how EFIN agreed to waive any potential claims against its officers allegedly conducting this misconduct. The freeze is intended to ensure investors receive the recovery they are due in exchange for their investments in EFIN’s fraudulent offerings. As part of the relief, a court appointed receiver is authorized to marshal assets on behalf of investor victims located wherever funds were misappropriated by EFIN officers or employees and provide victims with restitution through procedures established by the commission or through appropriate ex parte proceedings instituted before a federal district court judge.
The SEC’s action stands among other steps law enforcement takes to crack down on DeFi companies that threaten investor interests and compromise financial integrity within global markets.
Disgorgement of ill-gotten gains
The Securities and Exchange Commission has charged a so-called decentralized finance (DeFi) company, Fortem Capital Inc., with allegedly carrying out a fraudulent offering of more than $30 million in tokens.
Fortem allegedly defrauded purchasers by failing to disclose the terms of its offering, how those terms could be changed, and how it could manipulate prices. In addition, the company alleged omitted disclosures regarding related party transactions between Anthony Fung, a purported founder and principal of the company, and other related parties. It also falsely claimed to be registered with the SEC when selling valuation tokens purportedly backed by equity in other companies.
As part of its enforcement action against Fortem, the SEC is pursuing disgorgement of ill-gotten gains from its allegedly fraudulent offering and applicable civil penalties against Fortem and Fung for violating federal securities laws. In addition to disgorgement or any penalties received from this action, investors will have an opportunity to seek recovery for their losses from this offering.
Impact of the Charges
On March 16, 2021, the Securities and Exchange Commission (SEC) charged a so-called DeFi company for allegedly fraudulent $30M offering. This action is a warning to further crackdown against cryptocurrency frauds and scams.
The charges will significantly impact the DeFi industry, as it signals to investors that the market is not immune to regulation and fraud.
Let’s take a look at the potential impact of the charges.
The impact on the DeFi industry
The recent SEC charges against a so-called “DeFi” company for allegedly fraudulent $30M offering signals an important shift in the regulation of the DeFi industry. As regulatory scrutiny for companies in the decentralized finance (DeFi) space increases, new tools and policies will be needed to protect consumers and combat illegal activities.
The SEC’s actions demonstrate its commitment to ensuring digital asset offerings comply with applicable laws and rules designed to protect investors. In addition, this enforcement action should serve as a strong warning to potential issuers of digital assets. There is no place to hide if you intend to offer a security or commodity without meeting legal requirements.
The implications of this enforcement action will likely be felt across the entire DeFi industry. Companies must now ensure that any tokens offered are registered with the SEC or qualify under an exemption before offering them publicly. Moreover, those operating within the DeFi space may need to adjust their protocols and mechanisms to comply with applicable laws and regulations.
By providing clear guidance on what is permissible, regulators can ultimately help bring greater clarity and transparency into this young industry while preventing fraudsters from tarnishing its reputation by engaging in illicit activity.
The potential implications for other DeFi companies
The recent charges brought by the US Securities and Exchange Commission (SEC) against a so-called decentralized finance (DeFi) company, Block.one, has highlighted the potential implications of such accusations for other DeFi companies. The SEC alleges that Block.one raised $30 million from investors through an unregistered security offering worldwide. This type of violation could lead to severe penalties and regulatory changes for similar companies in this space, who have previously touted the autonomy of their services.
The charges have potentially wide-ranging effects for similar DeFi businesses who have possibly been eyeing IPOs or public listing options in the future due to lax regulating authority over these decentralized establishments. As a result, it is possible that these companies could face stricter regulations imposed from outside parties to insure better consumer protection rights, as well as more robust market integrity and compliance procedures.
Also important is determining whether this type of legal action has made other blockchain startups reconsider when they may pursue legal funding options or evolve their technology into something more compliant and forward-thinking with present standards of investing regulation in mind. If such consequences were to arise, companies could find themselves between a rock and a hard place—treading lightly as they strive to adhere to necessary guidelines while also seeking reasonable means to grow their enterprise without putting it at legal risk or malpractice charges down the line.
Conclusion
On October 7, 2020, The Securities and Exchange Commission (SEC) charged a so-called Decentralized Finance (DeFi) company with engaging in an alleged fraudulent $30 million offering. According to the SEC, the company and its founder misrepresented key facts to investors, including its activities, revenue projections and data security measures. Further, the SEC alleges that investors were unaware of risks associated with investing in the DeFi project or potential conflicts of interest between the company’s founders.
The SEC’s complaint charges two entities associated with this offering—Q3 Technologies LLC (Q3T) and Zipmex Financial Limited (ZIPMEX)—and their respective founders. It alleges that Q3T and ZIPMEX acted as an unregistered broker-dealer when they offered and sold token interests to customers in their respective Decentralized Finance (DeFi) projects using both public websites as private messaging platforms such as Telegram. In addition, the SEC alleges that Q3T and ZIPMEX falsely represented factual information regarding their projects’ revenues, data security measures taken by the group or potential conflicts of interest among those associated with Q3T or ZIPMEX operations.
The SEC further alleges that when raising funds for their respective DeFi projects through token offerings, Q3T and ZIPMEX failed to disclose to investors material information about the applicable risks associated with investing in digital asset securities as required by law. Additionally, they failed to adequately disclose significant actual or potential conflict of interestQ related to their proposed offers and sales of securities tokens.
The SEC seeks permanent injunctions; disgorgement plus interest; penalties; penny stock bars; attorney’s fees and costs; rescission offers; rescission damages against certain defendants; registration violations against certain defendants; civil money penalties against certain defendants ; monitoring activities concerning digital assets under section 21(d)(6)(D)(i)(IV); anti-fraud violations against certain Defendants among other remedies.
