ICOs have been a key focus of SEC enforcement in recent years. Initially the Commission brought a series of these actions while cautioning investors with tools such as the “Howey” coin presentation, used to illustrate the risks. At the same time Chairman Clayton warned market professionals to enforce their gatekeep obligations or risk a visit from the staff. While crypto coins and digital assets have continued, the market that started as a way to “get off the grid” is now focusing at least in part on becoming mainstream.
Nevertheless, the Commission has continued to bring actions centered on digital offerings. The latest is one based on a coin that tied to an adult fantasy market. SEC v. Lucas, Civil Action No. 1:19 -cv-08771 (S.D.N.Y. Filed Sept. 20, 2019).
Defendant Jonathan Lucas is the founder and CEO of Fantasy Market, an unincorporated now defunct entity which was an online market place. In August 2017 Mr. Lucas created and launched the market and tied it to social media. Subsequently, he created the FM Whitepaper to generate investor interest in the Fantasy Market platform and an ICO. The offering was to be in two stages, a two week presale followed by a four week public token sale.
The FMT tokens were issued on the ERC-20 blockchain with a conversion ratio of 5 for $1.00. The sales were advertised in the U.S. and abroad. The Whitepaper used for the sales urged investors to purchase early at discount prices.
The Whitepaper stated that there would be an aggressive repurchase program through which investors could profit. The price was expected to increase over 600%, according to the paper. Investor funds would be pooled in digital asset wallets through which the investor could profit. The interests offered were in fact securities.
Investors were induced to purchase the securities with a series of misrepresentations. Those include representations about the development of the Fantasy Market’s platform and the use and amount of the proceeds.
In conducting the offering Mr. Lucas highlighted the credentials and talents of FM employees. The founding team was supposedly a unique group of industry specialist that had extensive experience working with the most talented women in the online performance industry. Three of the team members identified did not exist. Mr. Lucas also falsified his biography.
In investors were told that a pre-sale was held in which 150 institutional and accredited investors filled out the legal paperwork to participate. The claim was false. A representation by Mr. Lucas that about $4.5 million had been raised was also false as were claims regarding the proposed use of the proceeds. In fact, the offering only raised about $63,000 from 100 investors. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Section 10(b).
To resolve the case Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. He also agreed to the entry of a five year officer director bar and a five year conduct based injunction prohibiting any offering of securities except for personal use. Mr. Lucas will pay a penalty of $15,000. See Lit. Rel. No. 24607 (Sept. 23 2019).