On January 17, 2018, the Massachusetts Securities Division Enforcement Section filed a complaint against the company Caviar and its founder Kirill Bensonoff for violations of the Massachusetts Uniform Securities Act in connection with an ongoing initial coin offering (ICO).
This is Secretary of the Commonwealth William F. Galvin's first enforcement action related to an ICO. Last month, Secretary Galvin announced that the Massachusetts Securities Division would conduct a sweep of Massachusetts entities engaged in ICOs.
According to the complaint, Caviar is a Cayman Islands corporation, and Bensonoff conducts Caviar's business from his Brookline home.
Caviar and Bensonoff are charged with offering a security without registration or an exemption from registration, among other violations. The securities at issue are Caviar Tokens, which allegedly will represent an interest in a mixed pool of real estate and blockchain assets to be managed by Caviar. The complaint states that "Bensonoff and Caviar represent to investors that the proceeds from the ICO will be pooled and used to finance short-term 'flips' of residential real estate properties."
Caviar.io, the website where Caviar Tokens may be purchased, states that the token sale is not available in the United States. However, the complaint alleges that the procedures undertaken by Caviar to prevent sales to Massachusetts investors are inadequate because the identity verification process can be easily bypassed. Apparently, a state inspector used a cartoon character's name and a picture taken from Google images as a passport photo to bypass Caviar's identity verification process.
Caviar claims to have raised over $3.1 million through its ICO. Galvin's office seeks to require Caviar and Bensonoff to cease and desist from further conduct in violation of the securities laws of the United States and Massachusetts, offer rescission to all investors from whom they have received funds, disgorge all profits made from the ICO and pay an administrative fine.
The Massachusetts Securities Division's complaint against Caviar and Bensonoff is the latest in increasing law enforcement oversight of ICOs. The SEC's new Cyber Unit, for example, has also recently begun to crack down on ICOs. Massachusetts' actions portend more enforcement activities at the state level, regardless of what the SEC might do.
Companies seeking to conduct an ICO are well-advised to consult with legal counsel to avoid some of the common mistakes made by companies seeking to exploit this new financing technique.
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