The Office of New York State Attorney General Letitia James (“NYAG”) has filed a lawsuit to shut down technology company Coinseed. The state has accused the firm of selling unregistered securities in the form of digital tokens and operating as an unregistered broker-dealer while making material misrepresentations about the company, its management team, and fees charged to investors in connection with cryptocurrency trades.
Coinseed operates a mobile phone application that functions as a virtual currency trading platform. The application allows investors to round up everyday purchases from their linked credit and debit cards to the nearest dollar. Once the round-ups meet a five-dollar threshold, Coinseed debits the investor's bank account and invests the money into available virtual currencies of the investor's choosing. In so doing, Coinseed acts as an unregistered commodities broker-dealer, according to the NYAG.
The complaint alleges that Coinseed sold its own unregistered digital tokens to support the platform through an initial coin offering. According to Coinseed's offering materials, the tokens served no functional purpose within the application. The NYAG alleges that the tokens are securities in that purchasers of the tokens invested in a common enterprise and were led to expect profits solely from the efforts of Coinseed in establishing, operating, and expanding the Coinseed mobile application. As such, failure to register the securities prior to offering constitutes a violation of New York's Martin Act.
By soliciting investors, the complaint alleges that the company's CFO falsely held himself out as a former Wall Street trader when he in fact had no such experience. The NYAG also claims that the defendants made false and misleading representations about the technical skills of certain claimed members of the management team, who were never formally employed by Coinseed, and applied a hidden 0.5% surcharge on trades.
The NYAG is seeking a permanent injunction against Coinseed, and its CEO and CFO, prohibiting them from selling commodities in the state of New York, furthering the allegedly fraudulent practices, operating the Coinseed mobile application and making it available through application stores, as well as appointment of a receiver to wind down Coinseed's operations, take control of and return investor assets, return all funds raised in the offering, issue all outstanding dividends, and oversee the recall and destruction of all virtual currencies issued by Coinseed.
The Securities and Exchange Commission (“SEC”) filed a parallel action against Coinseed and its CEO in federal court for selling unregistered securities in violation of Sections 5(a) and 5(c) of the Securities Act of 1933 (15 U.S.C. §§ 77e(a) and 77e(c)). The SEC complaint alleges that token purchasers expected value from the token since it entitled them to 50% of the revenue Coinseed generated from “portfolio conversion fees” – a 1% fee assessed by Coinseed on the total value of a user's portfolio every time he or she utilized a feature of the application to convert his or her portfolio to match another user's portfolio. The SEC is seeking a permanent injunction prohibiting the defendants from engaging in further violations of Section 5(a) and 5(c), disgorgement of ill-gotten gains, an injunction prohibiting defendants from participating in any offering of a digital asset security, and civil monetary penalties.
The NYAG's press release announcing the state lawsuit revealed that this matter was investigated in parallel with the SEC. These actions demonstrate that state and federal regulators are coordinating efforts as they continue to train their sights on the sale of unregistered digital assets and material misrepresentations made in connection with the solicitation of digital asset investments.
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