On Monday, April 2, 2018, the U.S. Securities and Exchange Commission (SEC) charged two co-founders of Centra Tech, Inc. (Centra), a purported financial services company headquartered in Florida, with conducting a fraudulent unregistered initial coin offering (ICO) that raised more than $32 million from thousands of investors from July to October 2017. In a parallel action, the two co-founders were separately charged and arrested by the U.S. Attorney’s Office for the Southern District of New York.
According to the SEC’s complaint, Sohrab “Sam” Sharma and Robert Farkas, the two co-founders of Centra, allegedly conducted a fraudulent ICO in which Centra offered and sold unregistered investments through a “CTR Token”—an ERC20 token on the Ethereum blockchain. The defendants allegedly claimed that funds raised in the ICO would help build a suite of financial products and provide benefits, including a “crypto debit card” backed by Visa and MasterCard that would allow users to instantly convert cryptocurrencies into fiat currency, as well as a “Centra token rewards program” that would entitle investors to a share in Centra’s future earnings. In reality, the SEC alleges, Centra had no relationships with Visa or MasterCard. The SEC also alleges that 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 endorse the ICO on social media.
The SEC’s action follows previous enforcement actions and public pronouncements that the SEC intends to take action against actors in the ICO space who fail to comply with federal securities laws, and in particular those who engage in fraudulent conduct. Indeed, the SEC’s complaint specifically highlights the timing of the conduct at question—after the release of the SEC’s DAO Report of Investigation, which according to the SEC “warned the industry that digital securities can be, and often are, securities.” The SEC’s investigation is ongoing, and the SEC acknowledged the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority. Read the SEC press release here.