Secretary of the Commonwealth William F. Galvin is charging CoinDash, a local firm that invests in cryptocurrencies and residential real estate properties, with selling unregistered securities after it raised $7 million during an initial coin offering (ICO).
The complaint, says that the company and its founder, Alon Muroch, violated Massachusetts securities law in the way they designed, promoted and sold ” CDT tokens,” which are units of cryptocurrency that entitle their owners to receive a portion of the profits from CoinDash’s investment activities.
Galvin’s office — which labeled CoinDash’s ICO a “cryptocurrency scheme” — wants CoinDash to shut down the ICO, return all the money paid so far, and pay an administrative fine.
Muroch lives in Petah Tikva Area, Israel but established CoinDash in the Cayman Islands in the fall of 2017, the complaint states. Muroch previously ran another firm, PayKey, which invested only in residential real estate.
In response to the complaint, Muroch wrote in an email:
CoinDash has been seeking to be innovative in our use of blockchain technology in connection with real estate lending while also taking an approach that we think doesn’t implicate the securities laws. We certainly believe we haven’t misled or harmed anyone. I was very disappointed by the Secretary’s sudden filing of this complaint while we are in the midst of what we thought was a constructive dialogue. We expect to continue that dialogue and believe that we can meet the Secretary’s concerns regarding Massachusetts purchasers.
The charges against CoinDash are the state’s first enforcement action related to the cryptocurrency craze and come just over a month after Galvin issued a warning that his office would engage in “aggressive policing” of ICO — a controversial online fundraising process that exploded in popularity in 2017. The question at the heart of investigations from financial law enforcement officials, including at the U.S. Securities and Exchange Commission, has been whether these cryptocurrency tokens act as securities or whether they have a “utility” as a way to track transactions within a company’s tech product. That determination can vary from cryptocurrency to cryptocurrency.
One of Muroch’s associates at CoinDash presented the idea behind the project at “Boston’s First ICO Pitch Night,” in October. By investing in both cryptocurrency and real estate, the firm promises to give its token holders access to the returns possible if cryptocurrency valuations increase while hedging their risk with investments in the more stable real estate market. The company also built a “crowdfunding platform built on the Ethereum blockchain” that allowed real estate developers to raise funds for their projects.
CoinDash started selling its tokens publicly in early July 2017 with a goal of raising up to $12 million by the end of January. CoinDash said the tokens were not for sale to residents of the U.S. — an attempt to stay within the bounds of U.S. securities law — but Galvin’s office said a securities investigator was easily able to circumvent CoinDash’s identify verification process while using “using the name of a popular cartoon character” and submitting a passport photo pulled from a Google image search.