The Securities and Exchange Commission has charged Australian Craig Sproule and his companies Crowd Machine, Inc. and Metavine, Inc. for making materially false and misleading statements in connection with an unregistered offer and sale of digital asset securities.
According to the complaint, filed in the U.S. District Court for the Northern District of California, Sproule and his companies raised more than US$33 million from hundreds of investors through “a fraudulent and unregistered” initial coin offering in 2018.
Last year, two of those investors sued Crowd Machine and its Cayman-based affiliate Crowd Machine SEZC, alleging “a massive investment fraud” in relation to the cryptocurrency start-up’s Cayman token offering.
The SEC said that 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 decentralised network of users’ own computers instead of traditional centralised servers.
The Crowd Machine Compute Tokens (CMCT) would be used to compensate device owners for the use of their surplus processing power and to pay software developers for making available source code that users could compile into custom applications.
The company represented that it would grow a “community” of CMCT holders, and work to increase demand for the tokens, thereby increasing the secondary market value of CMCTs on digital asset trading platforms.
“In reality, Defendants never operationalised the Crowd Computer, CMCT purchasers were never able to use the tokens within the Crowd Computer ecosystem, and the secondary market for CMCTs all but disappeared, along with any value that CMCTs might once have held for token holders,” the SEC complaint said.
In addition, “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 securities regulator said in a press statement.
Kristina Littman, chief of the SEC Enforcement Division’s Cyber Unit, said, “As alleged, Sproule and Crowd Machine misled investors about how they were using ICO proceeds, spending funds on an entirely unrelated scheme.”
The SEC further alleges that Crowd Machine and Sproule did not register their offers and sales of CMCT tokens with the Commission and knowingly sold the Crowd Machine Compute Tokens to groups of investors, including individuals in the US, without determining whether the underlying investors were accredited.
Sproule, Crowd Machine and Metavine have settled with the SEC without admitting or denying the allegations. They have consented to judgments that were released at the same time as the SEC complaint.
Under the settlement, Sproule has agreed to pay a $195,047 civil penalty and is not allowed to participate in future securities offerings or to serve as an officer or director of a public company.
The CMCT tokens must be permanently disabled and should be removed from digital asset trading platforms.
Civil penalties and disgorgement in relation to Crowd Machine will be determined by the court at a later date.
The consented-to judgments are subject to court approval.
The Cayman Islands entity, Crowd Machine SEZC, was used in the ICO but is not party to the action. The company, a former subsidiary of Metavine, was based in Cayman Enterprise City. It is no longer operational and undergoing voluntary liquidation, the SEC complaint said.
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