On December 11, 2019, the SEC filed an enforcement action in the United States District Court for the Southern District of New York against United Data, Inc. d/b/a Shopin (“Shopin”) and its CEO (Eran Eyal) for violations of Sections 5(a) and 5(c) of the Securities Act for the sale of unregistered securities and violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder for material misrepresentations in connection with that sale. The SEC seeks a permanent injunction, an order barring Mr. Eyal from acting as a director or officer of any issuer registered with the SEC, an order prohibiting the defendants from engaging in any offering of digital securities, disgorgement of all “ill-gotten gains or unjust enrichment” (with pre-judgment interest), and a monetary penalty.
Shopin is a company with a mission to create a blockchain-powered “universal shopper profile” that would track customers’ purchase histories and allow it to make future product recommendations based on those purchase histories. Shopin allegedly was struggling financially, however, and conducted an ICO to raise capital. From August 2017 through April 2018, Shopin allegedly conducted an ICO of tokens called “Shopin tokens” and raised proceeds worth at least US $42.5 million. The ICO allegedly was conducted in two stages: (1) a pre-sale of tokens to individuals and investment syndicates beginning in August 2017 and (2) an ICO from March through April 2018.
Applying the test set forth in SEC v. W.J. Howey Co., the SEC alleges that Shopin tokens were unregistered securities because: (1) investors used digital currency to purchase Shopin tokens; (2) Shopin conveyed that investors’ funds would be pooled in a common enterprise by providing specific digital wallet addresses where investor assets would be pooled and later transferred to Shopin digital wallets or bank accounts to fund the creation of the Shopin ecosystem; and (3) Shopin highlighted the potential for “token appreciation” based on the experience and skills of the management team and the “critical, concrete steps” that Shopin would take to create the ecosystem, including its efforts to obtain adoption of the technology and listing of the token on exchanges.
The SEC also alleges that the defendants misrepresented to investors that (1) Shopin had successfully completed two pilots of the Shopin application at major retailers, (2) Shopin had ongoing partnerships with numerous prominent retailers that were providing Shopin with steady monthly payments, (3) Shopin was being advised by a prominent Silicon Valley blockchain entrepreneur, and (4) a successful online company was a Shopin investor.
In addition, the SEC alleges that Mr. Eyal misappropriated proceeds of the ICO to pay for over $500,000 of his own personal expenses, as well as to satisfy a judgment against Shopin’s predecessor entity.