Centra Tech, the blockchain company made famous by some big-name celebrity endorsements, has had its tokens classified as securities by the US Securities and Exchange Commission.
We reported on Centra Tech in April when its two founders were arrested by US authorities. Basically, it raised $32 million by falsely claiming to be developing a cryptocurrency debit card in partnership with Visa and Mastercard. In reality, the executive team on the website was fictitious, and no such products were being developed.
At the time, SEC Cyber Unit head Robert A. Cohen said: “We allege that the Centra co-founders went to great lengths to create the false impression that they had developed a viable, cutting-edge technology.”
The ICO was advertised by retired boxer Floyd Mayweather and rap musician DJ Khaled. They are not suspected to be involved in the con.
— Floyd Mayweather (@FloydMayweather) September 18, 2017
In the latest development, Judge Andrea Simonton of the Southern District of Florida court has decided that the tokens sold in the ICO are securities. It should be noted that the defendants do not contest this point.
Her reasoning runs thusly:
The definition of a security under US law is: “An offering is an investment contract if there is: (1) an investment of money (2) in a common enterprise, (3) with the expectation of profits to come solely from the efforts of others.”
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This investment doesn’t have to be cash, but can take the form of assets, as long as the investor commits them “to an enterprise or venture in such a manner as to subject himself to financial losses.”
The existence of a common enterprise must then be established – “a common enterprise exists where the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment of third parties.”
Simonton judged this satisfied because “the fortunes of individual investors in the Centra Tech ICO were directly tied to the failure or success of the products the Defendants purported to develop. An individual investor could exert no control over the success or failure of his or her investment.”
Given this, the definition of a security is met, and the punishments can start flowing. The defendants did not register their security; they sold their tokens in different states, the plaintiffs have suffered recoverable financial losses.
The defendants have no yet filed a defence of these charges, according to the court document.
The decision made in this court could set a precedent in the US, a country which still has not decided how to classify cryptographic tokens.
New order issued on 6/25 in the Centra Token class action. Mostly notable because of the Court’s explanation of why the tokens were in fact unregistered securities. (Note that the Defendants conceded this but the court provides an analysis anyway.
— Palley (@stephendpalley) June 27, 2018