The Crypto Czar is Shutting Down Fraudulent ICOs Like Titanium Blockchain and Centra TechCryptocurrency
On June 4, the U.S. Securities and Exchange Commission (the “Commission”) announced that Valerie A. Szczepaknik was named Associate Director of the Division of Corporation Finance and Senior Advisor for Digital Assets and Innovation for Division Director Bill Hinman. Valerie A. Szczepaknik is referred to informally as the “Crypto Czar” and is shutting down as many fraudulent ICOs as possible such as Titanium Blockchain Infrastructure Services Inc. (“TBIS”) and Centra Tech, Inc. (“Centra Tech”). Ms. Szczepaknik is supported by a talented group of people such as Robert A. Cohen, Chief of the SEC Cyber Unit, Lucas M. Fitzgerald, Jon A. Daniels and Alison R. Levine.
What were the Commission’s reasons for shutting down these ICOs?
Too much to list in this blog but the following are two problems that the ICOs had in common.
Sale of Unregistered Securities without Relying on an Exemption from Registration.
Centra Tech: According to the complaint filed on April 2, 2018, Sohrab “Sam” Sharma and Robert Farkas (the “Centra Defendants”) raised at least $32 million from thousands of investors through the sale of unregistered securities issued by Centra Tech. Centra Tech sold CTR tokens to the general public without filing a registration statement or qualifying for an exemption and the tokens were deemed to be securities by the Commission. Centra Tech raised funds from investors to purportedly create a financial services system that would enable holders of various hard-to-spend “cryptocurrencies” to convert their assets easily into legal tender, such as U.S. dollars, and spend “cryptocurrencies” in real time with the “Centra Card.”
TBIS: According to the complaint filed on May 22, 2018, the TBIS ICO was not limited by number of investors or investor accreditation status. Michael Alan Stollery aka Michael Stoller aka Michael Stollaire through two companies that he controls: Titanium Blockchain Infrastructure Services, Inc. and EHI Internetwork and Systems Management, Inc. aka EHI-INSM, Inc. (collectively the “TBIS Defendants”) offered and sold securities in the form of BAR digital assets to the general public, including to investors throughout the United States.
Offers and sales of securities must be registered, exempt from registration, or they are in violation of the federal securities laws. Some exemptions that provide an alternative to filing a registration statement include Regulation CF, Regulation A or Regulation D.
Material Misstatements, Omissions and False Representations
The Centra Tech and TBIS Defendants made material misstatements, omissions and false representations in connection with the unregistered sale of securities such as the following:
Centra Tech Defendants:
- Touted nonexistent relationships between Centra and well-known financial institutions, including Visa, Mastercard and The Bancorp despite the fact that Centra did not have any “partnership” or other relationship with Visa, Mastercard, or The Bancorp. When Visa caught wind of this, Visa directed Centra to “cease-and-desist from using the Visa-Owned Marks and from promoting that it is an authorized distributor of VISA payment cards [and] that any and all uses or references to VISA Owned Marks or any reference to Visa be immediately taken down from the [Centra website] or from any other online mediums (including social media sites and press releases).” Upon his receipt of the Visa cease-and-desist notice, Sharma immediately responded that, “[t]his matter has been brought to my attention. I will have this matter rectified in 48 hours.” Forty-eight hours later, on October 14, 2017, Sharma had still not taken down the VISA-Owned Marks.
- Claimed directly and through Centra’s marketing materials that the “Centra Token Rewards Program” entitled token holders to receive “rewards” of 0.8% of the total revenue that Centra earned from Centra Card transactions. Posted on social media, websites, white paper, press releases and promotional marketing material.
- Pictured fictional Centra executives in its promotional materials, and the photographs used to identify the fictional “executives” were photos taken from the internet or pictures of Defendants’ relatives. This is egregious! “Michael Edwards” was listed as the Chief Executive Officer and Co-Founder of Centra. Edwards’s LinkedIn profile stated that he had an M.B.A. from Harvard University and an extensive career in banking, first as a Financial Analyst at Bank of America, then as a VP of Business Banking at Chase Bank, and most recently as a Senior VP at Wells Fargo. “Jessica Robinson” was listed as the Chief Financial Officer, who had purportedly most recently served as the CFO at Johnson Communications for nearly five years. Neither Edwards nor Robinson is a real person.
- Paid celebrities to promote Centra’s ICO. On September 18, 2017, one celebrity Centra promotor tweeted: “Centra’s (CTR) ICO starts in a few hours. Get yours before they sell out, I got mine,” which Centra re-tweeted on its official Twitter handle.
Farkas made flight reservations to leave the United States on or about April 1, 2018. Before Farkas was able to board his flight, he was arrested by United States criminal authorities. Sharma was also arrested on April 1, 2018.
- Made false and misleading claims all with the purpose of enticing investors and hyping BAR digital assets so that Defendants could profit. Defendants’ key misrepresentations included prominently identifying by name and logo nearly thirty large well-known numerous blue-chip companies (and the Federal Reserve) as purported customers, and would-be customers of TBIS’s information technology services. Defendants did not have relationships with these companies (or the Federal Reserve) and had no basis to represent that any of them were customers of TBIS’s services, or even would-be customers of TBIS’s services. Shortly after completion of the ICO, Stollaire and TBIS began to receive demands from some of the companies that he and TBIS immediately stop referencing the companies and their logos but Defendants did not timely remove the logos. One of the first images that bombarded investors in defendants’ written offering materials depicted a full page chart with the following names and logos:
- Fictionalized a series of client testimonials that they used on their websites. The testimonials were false and misleading in several ways: either the person quoted no longer worked at the company, the person’s quoted name and/or title was fake, and/or the company had not authorized the publication of any testimonials.
- Falsely represented that they owned intellectual property. The TBIS whitepapers and other marketing materials included detailed descriptions of several products and services that would be available on the TBIS platform, as well as slogans that TBIS used such as: Company as a ServiceTM, Bring Your Own CloudTM (BYOCTM), DEXchangeTM, Mining as a ServiceTM, Instant ICO IncubatorTM, Desktop as a ServiceTM (DaaSTM), CryptoEscrowTM, The Ultimate Strength of the Blockchain … UnleashedTM, VORDEXTM. The whitepapers listed these purportedly trademark-protected items along with other products under the heading “CORE OBJECTIVES, PRODUCTS AND SERVICES.” By affixing the “TM” symbol to TBIS’s core products and services, the Defendants represented these to be trademark-protected. None of the claimed trademarks belong to the Defendants.
To help investors perform due diligence prior to investing in any ICO, the Commission has provided this guidance and even created a fake ICO website promoting Howey Coins – check it out!
If you are interested in learning more about ICOs or other methods of capital raising, please contact me at 202-869-0888 (ext. 107) or Lou Bevilacqua at 202-869-0888 (ext. 100). We would be happy to discuss this with you. You can also contact our Washington D.C. business lawyers by email at email@example.com.