Fraudulent Initial Coin Offering Raised More than $32 Million From Thousands of Investors
Two co-founders of a purported financial services start-up were charged on April 2, 2018 by the Securities and Exchange Commission with orchestrating a fraudulent initial coin offering (ICO) that raised more than $32 million from thousands of investors last year. According to the SEC’s announcement about the fraudulent ICO, criminal authorities separately charged and arrested both defendants.
Centra Tech., Inc. Co-Founders Masterminded a Fraudulent ICO
According to the SEC’s complaint Sohrab “Sam” Sharma (“Sharma”) and Robert Farkas (“Farkas”), co-founders of Centra Tech., Inc., allegedly, masterminded a fraudulent ICO in which Centra offered and sold unregistered investments through a “CTR Token.”
Sharma and Farkas, allegedly, claimed that funds raised in the ICO would help build a suite of financial products. They claimed, for example, to offer a debit card backed by Visa and MasterCard that would allow users to instantly convert hard-to-spend cryptocurrencies into U.S. dollars or other legal tender. In reality, the SEC alleges, Centra had no relationships with Visa or MasterCard.
To promote the ICO, Sharma and Farkas, allegedly, created fictional executives with impressive biographies, posted false or misleading marketing materials to Centra’s website, and paid celebrities to tout the ICO on social media.
Defendants Charged with Violating Anti-Fraud and Registration Provisions of the Federal Securities Laws
The SEC’s complaint, filed in U.S. District Court, Southern District of New York, charges Sharma and Farkas with violating the anti-fraud and registration provisions of the federal securities laws. The complaint seeks permanent injunctions, return of allegedly ill-gotten gains plus interest and penalties, as well as bars against Sharma and Farkas serving as public company officers or directors and from participating in any offering of digital or other securities. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Sharma and Farkas.
Sale of Unregistered Securities Issued in a “So-Called” Initial Coin Offering
According to the SEC’s complaint:
From approximately July 30, 2017 through October 5, 2017, Defendants raised at least $32 million from thousands of investors through the sale of unregistered securities issued by Centra . . ., an entity controlled primarily by Defendants. The Centra securities were issued in a so-called “initial coin offering” . . ., a term that is meant to describe the offer and sale of digital assets issued and distributed on a blockchain. Defendants sold the Centra Token (CTR) (“CTR Token” or “Centra Token”), an ERC20 token issued on the Ethereum blockchain, in Centra’s ICO. Defendants promoted the Centra ICO by touting nonexistent relationships between Centra and well-known financial institutions, including Visa, Mastercard and The Bancorp.
Defendants, individually and through Centra, engaged in an illegal unregistered securities offering and, in connection with the offering, engaged in fraudulent conduct and made material misstatements and omissions designed to deceive investors in connection with the offer and sale of securities in the Centra ICO. By doing so, Defendants violated and aided and abetted Centra’s violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (“Securities Act”), and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder.
The Centra ICO was an illegal offering of securities for which no registration statement was filed with the Commission or was then in effect, and as to which no exemption from registration was available. The Centra ICO was a generalized solicitation made using statements posted on the internet and distributed throughout the world, including in the United States, and the securities were offered and sold to the general public, including to United States investors, in this district and elsewhere.