RegulationDecember 16, 2019

SEC Charges CEO with Fraudulent Initial Coin Offering

Tech firm allegedly raked in $42 million by defrauding hundreds of investors.

Reported by Michael Katz

The Securities and Exchange Commission (SEC) has charged the founder of a software firm and the company with defrauding investors in an initial coin offering (ICO) that raised more than $42 million from hundreds of investors.

The SEC’s complaint said Eran Eyal, founder and CEO of UnitedData, Inc., which conducted business under the name Shopin, conducted a fraudulent unregistered security offering by selling Shopin Tokens in an ICO. The SEC also alleges that Eyal commingled funds from the offering with his own personal funds, and used offering proceeds to pay for personal expenses.

“Eyal used over $500,000 of investor funds for expenses such as his rent, retail shopping, entertainment, tickets to philanthropic events, and a dating service,” said the complaint, “but omitted to disclose to investors that he would use any proceeds for his own benefit.”

Shopin said it intended to use the funds from the sales of the Shopin Tokens to create universal shopper profiles that would track customer purchase history across online retailers. It would then recommend products based on the information. The data comprising the shopper profile would purportedly be placed on the blockchain.

Shopin was the successor company to an earlier entity with a similar business plan, which was failing when Eyal took control of it. Eyal started the offering to raise capital for the struggling business.

The SEC said that a critical selling point for Shopin was that the company had proven the utility of the application in successful pilot programs with retailers Bed Bath & Beyond and Ermenegildo Zegna. Eyal and Shopin allegedly claimed that during the pilot programs more than 700,000 of the retailers’ customers had signed up for the company’s application.

The firm and Eyal claimed the customers shopped on a dedicated page at the retailers’ websites. Marketing materials from Shopin claimed that the pilots generated a combined $14.7 million in revenue for the retailers in just 30 days.

But the SEC said Shopin never created a functional platform, and Eyal allegedly lied repeatedly to investors in connection with the offering. Among the misrepresentations were information about purported partnerships with certain well-known retailers and an unnamed prominent entrepreneur in the digital-asset space.

“The defendants knew, or were reckless in not knowing, the pilots never occurred and the statements concerning them were false,” said the complaint.

Eyal and Shopin were charged in federal district court in Manhattan with violating the antifraud and registration provisions of the federal securities laws. The SEC is seeking permanent injunctions, disgorgement with interest, and civil penalties. An officer-and-director bar is being sought against Eyal and Shopin, prohibiting them from participating in any future offering of digital-asset securities.

“The SEC seeks to hold Eyal and Shopin responsible for scamming innocent investors with false claims about relationships and contracts they had secured,” said Marc Berger, director of the SEC’s New York regional office. “Retail investors considering an investment in a digital asset that meets the definition of a security must be afforded the same truthful disclosures as in any traditional securities offering.”