By Anne Sherry, J.D.
The SEC and New York state filed charges against Coinseed, Inc., and its CEO for conducting an unregistered securities offering. The complaint filed by New York also includes Coinseed’s former CFO as a defendant and adds charges of fraud through the misrepresentation of trading fees and the management team’s experience in financial services. Coinseed sold tokens in 2018 to raise money for a mobile app that allows users to round up everyday purchases made on their linked credit and debit cards and invest those round-ups in a choice of virtual currencies (SEC v. Coinseed, Inc., February 17, 2021).
The SEC alleges that Coinseed and its CEO-founder conducted an unregistered offering from December 2017 to May 2018, whereby it received at least $141,000 in exchange for "CSD tokens." The funds were to be used to develop Coinseed’s crypto-trading mobile app and pay other business expenses. The defendants also told purchasers that they would receive a percentage of Coinseed’s fee revenue. Under Howey, the CSD tokens were securities, the SEC submits: token holders’ fortunes were tied to the defendants’, and reasonable purchasers would expect a profit from the defendants’ efforts because the tokens themselves had no "consumptive use" on the Coinseed platform or elsewhere. The defendants failed to register the offering and deprived investors of the information that would be contained in a registration statement.
Like the SEC, the New York Attorney General also brought a claim for registration violations, in the state’s case under the Martin Act. Not only was the offering itself unregistered, the state alleges, but the defendants acted as an unregistered commodities broker-dealer. (While the SEC’s complaint describes the CSD tokens in terms of their "consumptive use" rather than use the word "currency," the state complaint alleges that the tokens are virtual currencies that in turn are commodities under the Martin Act.) The SEC complaint focuses only on registration violations, but the New York complaint also alleges fraud.
Specifically, New York alleges that in operating as an unregistered commodities broker-dealer, the defendants made material misrepresentations and omissions to investors about fees by charging an undisclosed markup on virtual currencies traded on behalf of investors. Coinseed quoted one price to investors, which was not the same as the price quoted to Coinseed by its third-party trading platforms. Furthermore, in a white paper and other promotional materials, the defendants said that the management team included a blockchain specialist with a financial engineering degree from NYU, a back-end developer with a degree from MIT who worked at Microsoft, and a chief marketing officer who worked for the first VR cinema in the U.S. None of these people were ever employed or contracted by Coinseed, much less vital members of the management team, the complaint alleges.
Announcing the lawsuit, New York Attorney General Letitia James said it lets cryptocurrency traders know that her office will work to protect them against fraud. "Unregulated and fraudulent virtual currency entities, no matter how big or small, will no longer be tolerated in New York. For over three years, Coinseed and its executives flagrantly and illegally violated New York state laws, but the corporate greed perpetrated by Coinseed while committing fraud against thousands of investors ends now." Along with an injunction and bars, the complaint seeks restitution and disgorgement and the full closure of Coinseed’s business operations.
The case is No. 21-cv-01381.