The Securities and Exchange Commission has charged Rivetz Corp., its subsidiary in Cayman’s special economic zone Rivetz International SEZC, and the companies’ founder and CEO Steven Sprague, with conducting an illegal, unregistered offering of securities through an initial coin offering.
The token sale between July and September 2017 raised the equivalent of US$18 million from investors, who bought the digital asset with cryptocurrency ether. According to the securities regulator, about 30% of the 5,200 investors were American.
The SEC also claimed that the proceeds were used to pay Sprague a $1 million bonus and loan Sprague $2.5 million, which he used to purchase a house in the Cayman Islands that he then leased back to Rivetz International.
Special economic zone company Rivetz International was formally established under Cayman Islands law on 22 June 2017. In September 2020, Cayman Enterprise City sued Rivetz International and Rivetz Corp. for the non-payment of $71,460 in licence fees.
Rivetz is a now-defunct technology company that purportedly developed software to improve the security of digital devices.
According to the SEC complaint, filed in Massachusetts, Sprague claimed in a White Paper, published in June 2017, that Rivetz was building a “Global Attestation and Identity Network, powered by the Rivetz Token (RvT)” that aimed “to improve the security of devices on which we rely” and “to record and verify the health and integrity of the device using an RvT and blockchain technology”.
The company said in the paper that it had a “vision of a global ecosystem of cybersecurity checkpoints empowered by a blockchain microtransaction model”.
However, at the time of the token sale, no goods or services could be purchased with the tokens, and the tokens could not be used in any other Rivetz product or service, the SEC said.
Nevertheless, the securities regulator argues that the company promoted the value of RvT tokens as investments that purchasers could buy and sell on the secondary market.
“Rivetz communicated to would-be investors that the tokens would have value even if not being used in the ecosystem,” the complaint stated, adding that purchasers reasonably expected they might obtain future profits from buying RvT tokens “if Rivetz was successful in its entrepreneurial and managerial efforts to develop its business”.
The SEC alleges that, during the sale, the defendants did not conduct any “know your customer” due diligence on potential purchasers of the RvT token, nor did they determine whether each purchaser of RvT tokens was an “accredited investor” as defined in the US securities laws.
The SEC said the RvT token sale constituted a securities offering that was not registered with the regulator and did not qualify for an exemption from the registration requirement.
The complaint seeks an order to disgorge all “ill-gotten gains or unjust enrichment” derived from the activities of Rivetz Corp., Rivetz International SEZC and Sprague.
In a press release, the SEC thanked the Cayman Islands Monetary Authority for its assistance in the case.