Investors sue Cayman crypto start-up for fraud

Two investors have sued Crowd Machine Inc of Delaware and its affiliate, Cayman-based Crowd Machine SEZC, alleging “a massive investment fraud” in relation to the cryptocurrency start-up’s Cayman initial coin offering.

The plaintiffs claim to have lost their entire US$7.5 million investment after buying the company’s Crowd Machine Compute Tokens (CMTC) in a private offering.

In a complaint filed in the US District Court in Jacksonville, Florida, on 24 June, the plaintiffs state that company founder Craig Sproule and others used a white paper to solicit their investment.

In it, Crowd Machine said it was creating the Crowd Computer, a global decentralised execution engine designed to execute blockchain smart contracts and apps.

The plaintiffs allege that “the white paper, and other corporate marketing materials, stated repeatedly and falsely that the Crowd Computer was already being utilized by major Fortune 500 companies, who were themselves making significant investments in the technology”.

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They say the materials also represented that Crowd Machine had built a platform of global partners and was already generating revenue.

The complaint alleges that “the White Paper and many of its specific statements were a total fabrication” and that “the marketing produced the illusion of a genuine software startup to perpetuate a massive investment fraud”.

The plaintiffs – American Jason Bonayer and George Bachiashvili from the republic of Georgia – claim the defendants admitted the tokens were a security but did not register the offering as a security for public sale with the US Securities and Exchange Commission, instead placing the tokens for sale on unregulated exchanges in the Seychelles beyond the purview of US regulators.

The complaint states that after the 2018 ICO raised about $30 million, “Crowd Machine has never shown a sincere attempt at creating a product”.

In September 2018, Crowd Machine announced the company had been the victim of a token theft from the start-up project’s reserve wallet and recommended investors should not purchase CMCT until the criminal investigation was over.

Crypto exchanges in response suspended the trading of CMCT and the price of the token collapsed. Although two hackers were arrested in the case and trading of the token resumed, the price of CMCT never recovered.

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