SEC Halts ICO Coin Offering Supposedly Tied to Visa, MasterCard

Cryptocurrencies have been a focus of SEC Enforcement in recent months. The Chairman and senior staff members have repeatedly cautioned investors regarding the risks of these instruments while extolling market professional such as securities lawyers, accountants and others regarding their gatekeeper obligations. Nevertheless, public enthusiasm for all things “blockchain,” “crypto” or involving “ICOs” remains high as illustrated by the most recent action in this area by the agency. SEC v. Sharma, Civil Action No. 1:18-cv-02909 (S.D.N.Y. Filed April 2, 2018).

Defendant Sohrab Sharma is the founder of Centra Tech, Inc. He held various positions with the firm. Robert Farkas is the COO of Centra. From July 30, 2017 through early October 2017 Defendants raised about $32 million from thousands of investors through the sale of securities issued by Centra. The securities were issued as an ICO – an initial coin offering. A presale was also held in early July, marketed through press releases and posts to social media.

The ICO was marketed through a number of White Papers and other materials. The White Papers described the Centra ICO as a token offering in which 400 Contra Tokens would be sold for 1 Ether. The purpose of the Centra ICO was to raise capital for the completion and operation of the “world’s first Multi-Blockchain Debit Card and Smart and Insured Wallet.” This would be a financial system that would permit holders of hard-to-spend cryptocurrencies to easily convert their assets into legal tender using a Visa or MasterCard backed Centra Card.

Other marketing materials claimed that Centra developed what was called an “integrated Cryptocurrency Marketplace & Commerce Solution” using Centra Card, a “CBay Marketplace,” a Centra Wallet and a “ Currency Conversion Engine & Exchange Platform.” All of these services were safe and fully insured by the Protarian Insurance Group, according to the marketing materials used by Defendants.

Critical to the selling efforts were Centra’s claimed partnership with credit card companies and other financial institutions, its executives and profits for investors through dividends. First, the representation that Centra Card would operate on the Visa and MasterCard networks was critical. This supposedly permitted holders to engage in transactions with their cryptocurrency holdings. The marketing materials fortified these claims by including Visa and MasterCard logos. The firm claimed to have a similar relationship with The Bancorp and an insurance company that backed the operations.

In fact none of these relationships existed. By early October 2017, for example, Visa directed Centra to cease and desist from using its logo and marks. The Bankcorp also issued a cease and desist notice to Centra. The insurance company was fictitious.

Centra also claimed that its Token would be listed on various prominent digital asset exchanges. For example, the firm’s marketing materials represented that it would “get listed in our sponsoring exchange Kraken with Poloniex and Bitrex to follow . . .” In fact the firm had no relation with Kraken.

Second, Defendants used fictitious biographies to promote Centra. Michael Edwards was listed as the CEO of the firm. A LinkedIn profile stated the executive had a Harvard MBA and an extensive career in banking with prominent firms. Jessica Robinson was represented to be the CFO of the firm. She supposedly had substantial experience at another firm. The executives were fictitious, according to the complaint.

Third, the White Paper claimed that the Centra had spectacular growth potential. That growth would fund a dividend to investors. Defendant Sharma acknowledged that no dividend would be paid. When one investor demanded the payment, Mr. Sharma first declined; later he offered to pay it – but only for that investor.

The Commission issued subpoenas to each Defendant in February 2018. By March 30, 2018 Centra’s bank accounts were depleted and most employees terminated. Mr. Farkas, who had flight reservations to leave the U.S. on April 1, 2018 was arrested before he could board the plane. Mr. Sharma was arrested on April 1, 2018.

The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The complaint is pending. See Lit. Rel. No. 24090 (April 2, 2018). The Manhattan U.S. Attorney’s Office filed a parallel criminal action.