On January 5, 2022, the United States Securities and Exchange Commission announced its first enforcement action of the year concerning a fraudulent initial coin offering. This is the latest in a long list of enforcement actions by the SEC targeting unregistered digital asset offerings. The SEC charged Australian citizen Craig Sproule and two companies he founded, Crowd Machine, Inc. and Metavine, Inc., with making materially false and misleading statements in connection with an unregistered offer and sale of digital asset securities.
According to the SEC’s Complaint, Sproule, who referred to himself in social media postings as the “Man behind the Machine,” claimed to have raised $40.7 million in an initial coin offering of Crowd Machine Compute Tokens (CMCTs). In this offering, which occurred between January and April 2018, Sproule told investors that the ICO proceeds would be used to develop a new technology that would enable Metavine, Inc.’s existing application-development software to run on a decentralized network of users’ own computers. Instead, according to the SEC, Crowd Machine and Sproule began diverting more than $5.8 million in ICO proceeds to gold mining entities in South Africa – a use that was never disclosed to investors.
The SEC also alleges that Crowd Machine and Sproule did not register their offers and sales of CMCT tokens with the Commission and knowingly sold CMCTs to “ICO pools” — groups of investors, including individuals in the U.S. — without determining whether the underlying investors were accredited.
The SEC’s complaint charges Sproule and Crowd Machine with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the registration provisions of Sections 5(a) and (c) of the Securities Act. Sproule and Crowd Machine did not admit or deny the allegation. But they did consent to judgments permanently enjoining them from violating these provisions and participating in future securities offerings, ordering undertakings to permanently disable the CMCT tokens and seek their removal from digital asset trading platforms. Sproule agreed to a prohibition against serving as an officer or director of a public company and to pay a $195,047 civil penalty.