The SEC filed an action to halt the initial coin offering ("ICO") of Centra Tech, Inc. ("Centra"), charging two Florida businessmen with engaging in a fraudulent scheme to raise funds from investors through the sale of unregistered securities. Publicly promoted by former professional boxer Floyd Mayweather, the Centra ICO raised over $32 million from investors worldwide. It is the latest action by the SEC's Cyber Unit to police transactions involving distributed ledger technology and ICOs, and apply traditional securities laws to transactions involving emerging technologies within the financial sector.

In a Complaint filed in the U.S. District Court for the Southern District of New York, the SEC alleged that Centra co-founders Sohrab Sharma and Robert Farkas issued "CTR Tokens" and sold the digital assets through an illegal, unregistered ICO. According to the SEC, the two represented that investor funds would be used to create a system that would facilitate the easy conversion of cryptocurrency assets to fiat currency (such as U.S. dollars), including the issuance of a debit-like "Centra Card," which would allow cardholders to spend cryptocurrencies in real time. The SEC claimed that the defendants touted various nonexistent partnerships with prominent credit card companies and financial services firms, falsely claimed that investors would be eligible for a share of future revenues associated with the "cryptocurrency debit card," and publicized profiles of fictional company executives in order to solicit investors. The defendants' various claims about the Centra ICO were publicized in an online white paper, as well as via social media, websites and press releases.

In a parallel criminal action, the U.S. Attorney's Office for the Southern District of New York filed criminal charges against both defendants. Mr. Sharma and Mr. Farkas were arrested on April 1, 2017, reportedly just before Mr. Farkas was planning to leave the country.

Commentary / Joseph V. Moreno

The SEC's action against Centra hardly comes as a surprise – the company was already facing a $30 million class action for allegedly misleading investors, and the SEC has signaled its skepticism of celebrity-endorsed investment opportunities. The bigger picture is the SEC's continued crackdown on unregistered ICOs – even in the absence of fraud – since its cease and desist order stopping the Munchee Inc. ICO in December 2017. In determining that certain ICOs are "investment contracts" and, therefore, securities under the "Howey Test," the SEC can continue shutting down ICOs for which no registration statement was filed. Further, recent correspondence from the U.S. Treasury Department's Financial Crimes Enforcement Network has suggested that ICOs that manage to avoid SEC jurisdiction may nonetheless be subject to registration and money laundering reporting obligations under the Bank Secrecy Act. Within this environment of regulatory scrutiny and uncertainty, it is hard to predict whether and how ICOs will fare going forward.

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