Notable ICO Scams

Regulatory

Notable ICO Scams

Regulatory uncertainty has been both a blessing and a curse for initial coin offerings (ICOs). It has allowed entrepreneurs to devise creative solutions to their operational problems — but the legal ambiguity has also resulted in significant chicanery. Indeed, since the early days of ICOs, entrepreneurs have found ample ways to deceive both investors and regulatory bodies.

This mix of novel technology and outrageous fraud has, understandably, earned the industry a reputation that gives many potential investors pause. 

Below are three notable cases where ICO issuers made false claims, or issued tokens that were non-compliant. The cases are disparate and involve different industries, but together they are indicative of just some of the industry’s biggest problems — both regulatory and otherwise.

A People’s Bank That Turned Personal 

AriseBank’s pitch to investors was crammed with hip buzzwords and celebrity endorsements. It was a “decentralized banking product” and the world’s first and largest cryptocurrency banking platform. (As of this writing, it was also the world’s last banking platform for cryptocurrencies). It was a “people’s bank,” meaning that it was not controlled by a centralized authority. The bank also roped in former boxing champion Evander Holyfield to shill for its ICO on Twitter.

But, perhaps the most intriguing part of AriseBank was its CEO, Jared Rice Sr. 

In an interview with Forbes, Rice Sr. spouted libertarian values and claimed to be a serial entrepreneur, who had earlier founded companies in the hip-hop industry. He was given to making “grandiose” statements about his past and present, according to Forbes. He told them that he hung out with hip-hop artists because he needed free WiFi. Asked why he didn’t simply use a public library’s WiFi, he said he was “already in the hip-hop industry.” Rice Sr. was also “so busy coding” that he didn’t know the amount that AriseBank raised in its ICO. (Estimates peg the amount as being between $600 million and $800 million).

None of this sounds all that unusual if you consider some of the characters made notorious by crypto. But Rice Sr. went a step further and made two controversial claims that eventually caught up with the company. The bank claimed that it offered FDIC-insured accounts to customers and that it had a partnership with Visa for crypto debit cards. Both denied any association with AriseBank, and the SEC swooped in, unleashing a flurry of charges against Rice Sr.’s team.  

It turns out Rice Sr. had earlier run-ins with the law. He had previously been charged with theft and tampering of government records after forging a Texas Secretary of State Incorporation document. He was also found to have spent ICO money on personal expenses, such as travel and hotel bills. Rice Sr. was arrested in November 2018. 

Centra Tech’s Wild Ride

Things can hardly go wrong when you have an industry-famous music DJ and the world’s wealthiest sports endorser backing your ICO. Yet that’s exactly what happened to Centra Tech., a Florida-based technology venture, whose ICO offering raised $32 million from investors on the strength of endorsements from both DJ Khaled and Floyd Mayweather. “Get yours (ICO tokens) before they sell out,” exhorted Mayweather to his Facebook followers. “I got mine and as usual I’m going to win big with this one!”

The company’s founders, Sam Sharma and Robert Farkas, claimed that they were building a cryptocurrency exchange and also had plans to issue a debit card backed by Visa and Mastercard for converting crypto to dollars. That claim turned out to be false. Stephanie Avakian, co-director of the SEC’s enforcement division, stated that Centra co-founders had spun “a web of lies about their supposed partnerships with legitimate businesses.”

Centra’s case was notable because the SEC filed charges against the ICO’s celebrity endorsers, who were forced to pony up $750,000 in fines. 

Interestingly, both Sharma and Farkas found their way to crypto after a stint in the luxury car rental business in Miami. Sharma had some prior experience in the field with Coin Success, which, according to its Facebook page was a “money making machine” and had “clients [who were] becoming rich overnight.”

Munchee’s Failed Review

The Munchee ICO was perhaps the most high-profile ICO halted by the SEC. The case highlights the most contentious aspect of coin offerings, namely the difference between utility tokens and security tokens. According to the Howey Test, defined by the Supreme Court in a 1946 court case, four criteria – an investment contract, expectation of profits, establishment of a common enterprise and use of a third-party to promote the enterprise — are used to establish whether an offering is a sale of securities or not. 

Munchee advertised its $MUN token as a utility that was primarily used for transactions, such as earning credits at participating restaurants. The founders of Munchee alluded to the possibility of profits in podcasts, and mentioned that investors could expect a price appreciation in a blog post. The SEC pointed to both these instances as proof that the ICO was built on an “expectation of profit” and, therefore, was in fact a securities sale.

The SEC shut down Munchee’s ICO and funds were returned to investors.

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