The SEC is continuing to crack down on illegal crypto offerings and their promotions. In the latest move, the Commission has brought charges against the crypto asset entrepreneur Justin Sun and three of his wholly-owned companies, Tron Foundation Limited, BitTorrent Foundation Ltd, and Rainberry Inc (formerly BitTorrent), for running the unregistered offer and sale of crypto asset securities Tronix (TRX) and BitTorrent (BTT).

Sun and his companies have also been charged over fraudulently manipulating the secondary market for TRX by extensive wash trading, and for orchestrating a scheme to pay celebrities to promote their cryptos without revealing their payments.

“As alleged in the complaint, Sun and others used an age-old playbook to mislead and harm investors by first offering securities without complying with registration and disclosure requirements and then manipulating the market for those very securities”, said Gurbir S Grewal, Director of the SEC’s Division of Enforcement. “At the same time, Sun paid celebrities with millions of social media followers to tout the unregistered offerings, while specifically directing that they not disclose their compensation.”

Illegal promotion

In connections to Sun’s charges, the SEC has also charged eight celebrities for illegally promoting TRX and/or BTT without revealing their compensation. One of the promotions were made in February 2021, by the actress Lindsay Lohan who promoted a crypto asset security on her Twitter in exchange for a payment of $10,000. By the time of the promotion, Lohan had approximately 8.4 million Twitter followers.

The SEC’s complaint alleges that Sun and his companies offered and sold TRX and BTT as investments through multiple unregistered “bounty programs”, where interested parties both promoted the tokens and recruited others to their channels.

Sun, BitTorrent Foundation, and Rainberry also allegedly offered and sold BTT in unregistered airdrops to investors. All these actions are violations of Section 5 of the Securities Act.

“Sun paid celebrities with millions of social media followers to tout the unregistered offerings, while specifically directing that they not disclose their compensation.”

Gurbir S.Grewal, Director of Division of Enforcement, SEC

Furthermore, Sun is also alleged to have violated the antifraud and market manipulation provisions of the federal securities laws by arranging to artificially inflate the apparent trading volume of TRX in the secondary market. Between April 2018 and February 2019, Sun made his employees engage in more than 600,000 wash trades of TRX between two accounts he controlled, with between 4.5 million and 7.4 million TRX wash-traded daily.

Sun also allegedly sold TRX into the secondary market, and gained $31m from illegal, unregistered offerings of the token.

“This case demonstrates again the high risk investors face when crypto asset securities are offered and sold without proper disclosure,” said SEC Chair Gary Gensler. “As alleged, Sun and his companies not only targeted US investors in their unregistered offers and sales, generating millions in illegal proceeds at the expense of investors, but they also coordinated wash trading on an unregistered trading platform to create the misleading appearance of active trading in TRX.

“Sun further induced investors to purchase TRX and BTT by orchestrating a promotional campaign in which he and his celebrity promoters hid the fact that the celebrities were paid for their tweets.”

Illegal Twitter promotion

Besides Lindsay Lohan, the SEC is also charging these seven celebrities for unlawful crypto touting of TRX and/or BTT:

• Jake Paul, $25,019 payment – 3.8 million Twitter followers.
• DeAndre Cortez Way (Soulja Boy)
• Austin Mahone
• Michele Mason (Kendra Lust), $955 payment – 1.2 million Twitter followers.
• Miles Parks McCollum (Lil Yachty), $10,000 payment – 5.3 million Twitter followers.
• Shaffer Smith (Ne-Yo), $12,000 payment – 6.6 million Twitter followers.
• Aliaune Thiam (Akon), $42,000 payment – 6.2 million Twitter followers.

By promoting the cryptos without disclosing their payment, all violated Section 17(b) of the Securities Act.

“This case demonstrates again the high risk investors face when crypto asset securities are offered and sold without proper disclosure.”

Gary Gensler, chair, SEC

Six of the celebrities have, without admitting or denying, agreed to settle the charges by paying a total of more than $400,000 in disgorgement, interest, and penalties. They have also agreed to not promote any cryptocurrency for the next three years.

Cortez Way and Mahone have not settled with the charges.