New Jersey Joins Effort to Stop Unregistered AI-Crypto Offering | Practical Law

New Jersey Joins Effort to Stop Unregistered AI-Crypto Offering | Practical Law

The New Jersey Bureau of Securities, in coordination with several states bringing state law securities enforcement actions, issued a cease-and-desist order against an individual and his organizations, the Shark of Wall Street and Hedge4.ai, in connection with an unregistered digital asset securities offering purportedly powered by artificial intelligence (AI).

New Jersey Joins Effort to Stop Unregistered AI-Crypto Offering

Practical Law Legal Update w-039-5816 (Approx. 4 pages)

New Jersey Joins Effort to Stop Unregistered AI-Crypto Offering

by Practical Law Finance
Published on 07 Jun 2023 • USA (National/Federal)
The New Jersey Bureau of Securities, in coordination with several states bringing state law securities enforcement actions, issued a cease-and-desist order against an individual and his organizations, the Shark of Wall Street and Hedge4.ai, in connection with an unregistered digital asset securities offering purportedly powered by artificial intelligence (AI).
On May 3, 2023, the Bureau of Securities (NJ Bureau) issued a cease-and-desist order (NJ order) against Horatiu Charlie Caragaceanu and his organizations, the Shark of Wall Street (TSWS) and Hedge4.ai (collectively, with Caragaceanu, respondents), in connection with the offering of TruthGPT Coin, a cryptocurrency that purportedly uses an artificial intelligence (AI) model called "Elon Musk AI," in violation of New Jersey state securities laws. The NJ Bureau issued the NJ order against respondents in coordination with state securities law enforcement actions brought by several other states against respondents. According to the NJ order:
  • Caragaceanu described TSWS and Hedge4.ai as "AI labs" that act through "machine learning programmers and ethical hackers."
  • Respondents promoted TruthGPT Coin as a cryptocurrency that uses an AI model called Elon Musk AI.
  • Respondents asserted that this AI model is purportedly able to:
    • analyze various cryptocurrencies;
    • predict future digital asset prices; and
    • differentiate profitable investments from scam products.
  • Respondents touted the profitability of TruthGPT Coin claiming that TruthGPT Coin will increase in value by as much as 1,000 times.
  • Respondents misrepresented Elon Musk’s endorsement of TruthGPT Coin as:
    • investors were falsely told Elon Musk endorsed TruthGPT Coin; and
    • animated avatars and images of Elon Musk were used to demonstrate his endorsement.
  • Promotional media from respondents falsely showed the purported involvement of various other public figures.
  • Respondents' website purported to incorporate a communications platform that permitted users to interact with these and other public figures.
  • Respondents were not registered with the NJ Bureau in any capacity.
The NJ order notes that respondents have promoted various digital asset investments, including DNGToken, Hedge4Coin (HEDJ Token), Hedge4.AI Token (HEJJ Token), and TSWS Token, all digital tokens, as well as several collections of NFTs. These digital tokens and NFTs are referred to collectively in the NJ order as "unregistered securities."
The NJ order concludes as a matter of law that:
  • The unregistered securities are securities as defined under New Jersey law (N.J.S.A. 49:3-49(m)).
  • Respondents are offering securities that are neither registered with the NJ Bureau, nor "federally covered," nor exempt from registration, in violation of New Jersey law (N.J.S.A. 49:3-60).
  • TSWS and Hedge4.ai are attempting to effect transactions in 17 unregistered securities for the accounts of others or for their own account without registration as a broker-dealer in violation of New Jersey law (N.J.S.A. 49:3-56).
The NJ order was obtained in connection with an earlier coordinated enforcement action that also included regulators in Alabama, Kentucky, Montana, and New Jersey initiated by the Texas State Securities Board against respondents. On May 3, 2023 the Texas securities commissioner entered an emergency cease-and-desist order (TX order) demanding respondents cease offering for sale any security in Texas and conducting certain other operations in violation of Texas state securities laws. According to the TX order, TruthGPT Coin and the other digital asset investments named in the TX order have not been registered for sale in Texas and respondents have not been registered as dealers or agents in Texas.
In addition to the TX order and the NJ order, the Alabama Securities Commission issued a cease and desist order (AL order) demanding respondents cease violating Alabama state securities laws, and the Kentucky Department of Financial Institutions filed an administrative complaint (KY complaint) seeking an order against respondents to cease violating Kentucky state securities laws in connection with their sales of digital asset investments.
Since the initiation of those coordinated state actions, respondents' TruthGPT Coin website has been taken down. Both the NJ order and TX order report that, despite respondents' representations, the cryptocurrency tokens previously offered by respondents never significantly increased in value and the tokens never secured listings on any major centralized cryptocurrency exchange. According to both the NJ order and the TX order, the fair market value of each token is now $0.