New Jersey got in on the cryptocurrency offering enforcement action on July 18, suing blockchain-based online rental marketplace Pocketinns for an unregistered sale of securities last year.
The state’s attorney general, Gurbir Grewal, was joined by the New Jersey Bureau of Securities today in announcing a three-count enforcement action against Princeton-based Pocketinns and its president, Sarvajnya Mada, over the January 15-31, 2018, sale of $410,000 in PINNS Tokens in an initial token offering.
The U.S. Securities and Exchange Commission (SEC) has brought several similar suits, initiating a high-profile action against blockchain instant messaging service Kik in June for its $100 million ICO in 2017. The agency released a long-awaited “plain English” guide defining when an ICO is a security in April.
Aside from violating the Garden State’s Uniform Securities Law by failing to register the offering, Grewal alleged that Mada acted as an unregistered agent and Pocketinns employed an unregistered agent during the sale.
Pocketinns’ website now redirects to the Google homepage. The ITO does not appear to have been very successful, as Pocketinns sought to raise as much as $46 million, Grewal noted in a statement.
“Our securities laws apply to anyone offering or selling securities in this state, regardless of whether those securities are purchased with U.S. dollars or virtual currencies, and regardless of whether they are distributed in certificated form or through blockchain technology,” said Grewal. “The lawsuit we filed makes it clear that individuals selling cryptocurrency-related investment products in New Jersey must comply with the law or face serious consequences.”
Grewal pointed out that the PINNS Tokens were marketed as an investment—a key factor in making an initial offering’s cryptocurrency a security—as well as a transaction tool on the under-construction PINNS ecosystem.
He also disputed PINNS’ claim that the sale was legal under the Reg D exemption to the SEC’s initial offering security registration requirements. This allows the sale of securities to accredited investors, defined as companies with assets of $5 million or individuals with either a net worth of $1 million or income of $200,000 over the previous two years.
The suit claims that only 11 of the 217 PINNS Token purchasers provided documentation that they qualified as accredited investors.
“By failing to take reasonable steps to verify that purchasers were accredited investors capable of bearing the increased risks associated with unregistered securities, the defendants violated the law and exposed investors to financial losses that could have been devastating,” said Paul Rodríguez, acting director of the New Jersey Division of Consumer Affairs, which oversees the Bureau of Securities. “We’re reminding investors to be extra vigilant about fully vetting what is being sold, especially before investing with cryptocurrency.”
Ironically, Pocketinns trumpeted its ITO in a December 2017 Medium post titled, “The Era of the Completely Legal ICO Begins with POCKETINNS.”
Noting its offering was an ITO rather than an ICO, the post began, “Initial coin offerings (ICOs) have rapidly transformed the way we invest. The sad thing is that silly, ill-prepared, and even fraudulent players have damaged the reputation of a revolutionary way to fund promising projects. In fact, just today, the ICO known as Munchee was halted by SEC and ordered to give a full refund to all investors.”
The ITO was “fully compliant,” the post claimed, saying “[w]e’re SEC self regulated (Exempt securities offering under Rule 506c- Accredited investors worldwide only).”