Emergency lawsuit filed against ICO to block selloff of $8 million in investor assets

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The U.S. Securities and Exchange Commission (SEC) has filed suit to freeze the assets raised by Veritaseum’s VERI Token ICO that occurred in 2017.

The SEC also announced fraud charges against the man behind the VERI Token, Reginald “Reggie” Middleton, and two associated companies: Veritaseum, Inc. and Veritaseum, LLC.

Emergency action taken to protect investors

The VERI Token ICO took place at the beginning of the 2017 crypto market runup and netted approximately US$14.8 million [AU$21.79 million] from investors.

Out of the total amount raised, Middleton was still in possession of roughly $8 million, and the SEC asked him earlier this month to stop selling off the assets.

Middleton ignored the directive from the SEC and moved a “significant amount” of investor assets before liquidating them into his personal account.

SEC

At that time, the SEC moved into action and filed their complaint.

“After learning about Middleton’s transfer of funds, we took quick action to prevent the further dissipation of investor assets. Whether in digital currency or plain cash, we will act to protect investor assets and to pursue fraud and manipulation in our securities markets,” said Marc P. Berger, Director of the SEC’s New York Regional Office.

VERI Token a ‘fraudulent scheme’

The SEC alleges that Middleton and his associated companies operated a fraudulent scheme with their ICO.

The federal agency notes that retail investors were induced to invest in the token through “multiple material misrepresentations and omissions.”

This litany of lies included Middleton and his associates allegedly misleading investors about their prior business ventures, creating the illusion of tremendous investor demand for the VERI Token, offering spectacular profits, and the belief that Veritaseum had products ready to go to generate revenue when the companies actually did not.

In addition, Middleton traded VERI on an unregistered trading platform to manipulate the price, which shot up 315% in one single day, in order to drive up investor interest.

The SEC alleges that the ICO for the VERI Token was an unregistered (and therefore illegal) securities offering, although Middleton claims the token is actually “software” or “pre-paid fees”.

The agency is charging Middleton and Veritaseum with violating the registration and anti-fraud provisions of U.S. federal securities laws, with Middleton facing an additional charge of violating anti-fraud provisions over his manipulative trading of the VERI Token.

The SEC is seeking redress of permanent injunctions against the defendants, along with disgorgement plus interest and penalties, and a bar from offering digital securities in the future.

The SEC is also seeking to bar Middleton from acting as an officer or director of any public company in the future.

The SEC has been taking unregistered ICOs to court.

The SEC versus ICOs

The U.S. Securities and Exchange Commission has been very active in going after ICOs they consider as being unregistered securities.

In June, the SEC filed suit against Kik Interactive for its $100 million KIN token ICO, of which $55 million was raised from U.S. investors.

The agency notes that Kik did not file for registration for the ICO, saying the Kin token is a security.

Speaking about the lawsuit, Robert A. Cohen, Chief of the Enforcement Division’s Cyber Unit, noted that “Kik told investors they could expect profits from its effort to create a digital ecosystem.”

“Future profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws,” he added.

The SEC recently settled their lawsuit against PlexCorps, the creator of the PlexCoin.

The founder of the PlexCoin, Dominic Lacroix, and Sabrina Paradis-Royer, his partner, agreed to pay $1 million each for their part in the fraudulent scheme and to never engage in offering securities again.

PlexCorps itself was fined $4.56 million with an additional $350,000 in interest.