In the 1920s, a new form of investment fraud roared into the markets with the advent of the Ponzi scheme. Last week, the Securities and Exchange Commission (SEC) filed a complaint captioned SEC v. Okhotnikov et al. in the U.S. District Court for the Northern District of Illinois, alleging that 11 crypto founders and promoters are using the same illegal money-making tactics employed by Charles Ponzi a century ago.1 The SEC alleges that the defendants employed a "textbook pyramid and Ponzi scheme," fraudulently raising more than $300 million from millions of retail investors worldwide, in connection with the crypto platform Forsage. This action continues the wave of aggressive SEC enforcement in the crypto space.

Key Takeaways

  • The Forsage Complaint makes clear that the SEC continues to conclude that "smart contracts" that operate on blockchain applications and allow for transactions of digital assets are securities, under the Supreme Court's Howey test.2 This is consistent with the SEC's previous "smart contracts" enforcement.3
  • The SEC continues to pursue aggressively what it deems to be fraudulent crypto schemes, even where key defendants are foreign nationals and the agency will no doubt face challenges in collecting civil penalties or other monetary relief. In the Forsage Complaint, for example, four of the 11 defendants are Russian nationals and are believed to reside in Russia, Georgia, and Indonesia. The SEC's July 2022 complaint concerning alleged insider trading on the Coinbase platform charges two Indian nationals.4
  • The SEC's heavy scrutiny of crypto markets is here to stay. In May 2022, the SEC nearly doubled the number of attorneys in the Division of Enforcement's Crypto Assets and Cyber Unit, which, since its inception in 2017, has brought more than 80 enforcement actions in the crypto space.5 We expect this trend of aggressive crypto enforcement to continue.

Forsage Complaint: An Alleged "Textbook Pyramid and Ponzi Scheme" Under Which Investors Profited off the Participation of Recruits

According to the SEC's complaint, Forsage was launched in January 2020 by four Russian nationals who "aggressively" marketed online crypto investments to U.S. and foreign investors. In addition to the four Russian founders, the SEC also sued seven U.S. nationals and residents who allegedly promoted the scheme using YouTube channels and social media platforms. The SEC alleges that investors were induced to enter into crypto transactions via "smart contracts" that operated on the Ethereum, Tron, and Binance blockchains. According to the complaint, each platform contained at least three "smart contracts" which had "slots" available for purchase by investors. These "slots" could later be sold to other individuals, who were recruited by the investors, as a way for the investors to earn compensation.6

As it must, the SEC started with an analysis of whether the "slots" in the smart contracts were securities under the Supreme Court's decision in Howey.7 The SEC alleges that these "slots," and the investors' attendant right to earn compensation from "slot" sales, were securities because "[i]nvestors made an investment of money—using Ethereum, Tron, or Binance tokens—in a common enterprise from which they were led to expect profits solely from the efforts of Defendants or third parties."8 As the "slots" were not registered with the SEC and did not qualify for a registration exemption under the Securities Act of 1933 (the "Securities Act"), the SEC alleges that the defendants violated Section 5 of the Securities Act.

As to the nuts and bolts of the fraud, the SEC alleges that Forsage was not providing a bona fide investment opportunity for its investors, but rather was a pyramid scheme whereby "[t]he primary way for investors to make money from Forsage was to recruit others into the scheme."9 The SEC alleges that "all payouts to earlier investors were made using funds received from later investors"—the hallmark of a classic Ponzi scheme.10 Forsage's investors would also allegedly participate in "profit sharing in the form of spillover payments from other investors in the larger Forsage network."11 These "spillover payments" were tied to the number of "slots" that were purchased or sold; more "slots" purchased or sold translated into more earnings for the pool of Forsage investors in accordance with the applicable "smart contract."12 Despite the defendants' "aggressive promotion of Forsage as an income-generating opportunity," the SEC alleges that the significant level of earnings touted by the defendants "simply was not attainable for most investors given that Forsage operated as a pyramid scheme."13 As a result, the SEC alleges that the defendants violated Section 17(a) of the Securities Act, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC has asked the court to enjoin the defendants from further violations of the federal securities laws, including their engagement in this alleged scheme, along with disgorgement, civil monetary penalties, and other relief.

Interestingly, the SEC is not the first regulatory body to take issue with this "scheme." In September 2020 and March 2021, the Securities and Exchange Commission of the Philippines and the Montana Commissioner of Securities and Insurance, respectively, issued cease-and-desist actions against Forsage for "operating as a fraud."14


The SEC continues to aggressively pursue potential federal securities laws violations in the crypto world, even where there may be a low likelihood of recovery for investors due to the alleged perpetrators residing, and presumably the ill-gotten gains being located, outside the United States. We expect that the SEC will continue to flex its muscles in the crypto space, and those involved in crypto offering and lending should monitor these developments closely.

1.  Complaint, SEC v. Okhotnikov et al., No. 1:22-cv-03978 (N.D. Ill. Aug. 1, 2022) (“Forsage Complaint”).

2.  See SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

3.  See Press Release, SEC, SEC Charges EtherDelta Founder with Operating an Unregistered Exchange (Nov. 8, 2018),

4.  Press Release, SEC, SEC Charges Former Coinbase Manager, Two Others in Crypto Asset Insider Trading Action (July 21, 2022),

5.  Press Release, SEC, SEC Nearly Doubles Size of Enforcement's Crypto Assets and Cyber Unit (May 3, 2022),

6.  Forsage Complaint at 11–12.

7.  Howey, 328 U.S. 293.

8.  Forsage Complaint at 4.

9.  Id. at 3.

10.  Id. at 3.

11.  Id. at 12.

12.  Id. at 12–13.

13.  Id. at 26.

14.  Press Release, SEC, SEC Charges Eleven Individuals in $300 Million Crypto Pyramid Scheme (Aug. 1, 2022),

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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