U.S. SEC charges digital asset entrepreneur over $42 million fraudulent ICO

The U.S. Securities and Exchange Commission has charged the founder of an initial coin offering and his company with defrauding investors

What has happened?

The U.S. Securities and Exchange Commission (SEC) has charged digital asset entrepreneur Eran Eyal and his company, Shopin, with defrauding investors in a $42 million initial coin offering (ICO).

What does this mean?

According to the SEC complaint, from August 2017 to April 2018, Eyal, 44, of Brooklyn, conducted a fraudulent unregistered securities offering by selling Shopin tokens in an ICO.

The funds from the token sale were meant to be used to create universal shopper profiles, maintained on the blockchain, tracking customer purchase histories across online retailed and recommend products based on this information.

However, the SEC complaint alleges that Shopin never created a "functional" platform.

The complaint further alleges that Shopin and Eyal "repeatedly lied to investors in connection with its offering" and made various mispresentations.

These included claiming that Shopin had completed two successful pilots of its application at major retailers, falsely claiming that the company "had ongoing partnerships" with numerous prominent retailers, as well listing a "prominent Silicon Valley blockchain entrepreneur" as an advisor to its marketing materials, and misleadingly suggesting that a successful online company was an investor in Shopin.

The SEC also alleges that Eyal "misappropriated investor funds for his personal use", including at least $500,000 used for rent, shopping, entertainment expenses, and a dating service.

The SEC complaint charges Eyal and Shopin with violating antifraud and registration provisions of the federal securities laws, and seeks permanent injunctions, disgorgement with interest, and civil penalties.

It also seeks and officer-and-director bar against Eyal and a bar against both defendants to stop them from participating in any future offering of digital asset securities.

In a separate action, the New York Attorney General Letitia James also announced the convictions of Eyal for operating "a series of three securities fraud scheme", including his Shopin ICO.

According to the press release, Eyal pleaded guilty to felony securities fraud in violation of the Martin Act related to the Shopin scheme.

As part of his convictions, he has been ordered to surrender the remaining cryptocurrency received from Shopin investors, which is currently valued at about $450,000.

He also pleaded guilty to two counts of Scheme to Defraud in the First Degree, a Class E felony, related to his two prior companies – Springleap, Inc. and Passo Sync, Inc – and was ordered to pay $125,000 in restitution and $475,000 in judgments to investors in Springleap,

As a condition of his pleas, Eyal was also required to step down as CEO of Shopin, and is banned from raising capital or serving as an officer in a business in New York for three years.

Next steps

If you want to take advantage of blockchain's huge potential and disruptive impact, while keeping track of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.

Gregory Lisa
Washington D.C.


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