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SEC Charges Celebrities and Crypto Entities Affiliated with Justin Sun with Securities Laws Violations
Practical Law Legal Update w-038-9825 (Approx. 5 pages)
SEC Charges Celebrities and Crypto Entities Affiliated with Justin Sun with Securities Laws Violations
by Practical Law Finance
| Published on 28 Mar 2023 • USA (National/Federal) |
The SEC filed charges against Tron Foundation Limited, Bittorrent Foundation Limited, Rainberry, Inc., and their founder and chief executive officer, Justin Sun, for the unregistered offer and sale of crypto-asset securities, fraudulent manipulation of the secondary market for crypto-asset securities, and orchestration of a scheme to pay celebrities to unlawfully tout crypto-asset securities. In a related matter, the SEC also charged eight celebrities with unlawful touting of crypto-asset securities.
On March 22, 2023, the SEC filed a complaint against Tron Foundation Limited, Bittorrent Foundation Limited, Rainberry Inc. (collectively, Sun companies), and their founder and chief executive officer, Justin Sun, with violations of:
- Sections 5(a) and (c) of the Securities Exchange Act of 1933, as amended (Securities Act) (15 U.S.C. §§ 77e(a) and (c)) for the unregistered offer and sale of crypto-asset securities.
- Section 17(a)(1) and (3) of the Securities Act (15 U.S.C. §§77q(a)(1) and (3)) and Sections 9(a)(1) and (2) and 10(b) of the Securities and Exchange Act of 1934, as amended (Exchange Act) (15 U.S.C. §§ 78i(a)(1)(2) and 78j(b)) and Rule 10b-5 of the Exchange Act (17 C.F.R. § 240.10b-5) for the fraudulent manipulation of the secondary market for crypto-asset securities.
- Section 17(b) of the Securities Act (15 U.S.C. § 77q(b)) for the orchestration of a scheme to pay celebrities to unlawfully tout crypto-asset securities.
According to the complaint, Sun, a Chinese national, founded the Sun companies and used them to engineer the offer and sale of two crypto-asset securities called TRX and BTT. Around August 2017, Sun and the Sun companies became engaged in a scheme to distribute billions of TRX and BTT to the public while also creating active secondary markets on which TRX and BTT could be traded. The complaint alleges that Sun companies offered TRX and BTT as securities but did not file a registration statement in connection with the offering, and no exemption from registration was available.
The complaint also alleges that Sun directed the manipulative wash trading of TRX through the Sun companies to create the artificial appearance of legitimate investor interest to keep TRX's price afloat. According to the complaint, none of the trades involved any change in beneficial ownership or had any legitimate economic purpose.
According to the complaint, Sun and the Sun companies created a publicity campaign to drive public interest in TRX and BTT that involved paying the following celebrities to tout TRX and BTT on their social media accounts:
- Lindsay Lohan, who settled with the SEC with the issuance of a cease-and-desist order.
- Michele Mason, also known as Kendra Lust, who settled with the SEC with the issuance of a cease-and-desist order.
- Miles McCollum, who settled with the SEC with the issuance of a cease-and-desist order.
- Jake Paul, who settled with the SEC with the issuance of a cease-and-desist order.
- Shaffer Smith, also known as Ne-Yo, who settled with the SEC with the issuance of a cease-and-desist order.
- Aliaune Thiam, also known as Akon, who settled with the SEC with the issuance of a cease-and-desist order.
- Austin Mahone, who has not yet settled with the SEC.
- Deandre Cortez Way, also known as Soulja Boy, who has not yet settled with the SEC.
Mahone and Way are listed as defendants in the complaint together with Sun and the Sun companies.
According to the complaint, in addition to the above, Sun and the Sun companies offered and sold approximately 542.6 million TRX to investors, including US residents, and generated net proceeds of more than $31.9 million for Sun and the Sun companies.
For further information on SEC regulation of digital assets, see Practice Note, SEC Regulation of Digital Assets.