U.S. Securities and Exchange Commission v. Crowd Machine, Inc.

Background

The SEC sued Crowd Machine, Inc., Metavine, Inc., and Craig Derel Sproule, and named Metavine Pty. Ltd. as a relief defendant. The complaint alleged that, between January and April 2018, the defendants raised more than $33 million from hundreds of investors through a fraudulent and unregistered initial coin offering of digital asset securities called Crowd Machine Compute Tokens, or CMCTs.

The defendants represented that the offering proceeds would fund a decentralized “Crowd Computer” network. The SEC alleged that the technology connected to that network was not functional when the tokens were offered, despite representations that the technology had been tested by major companies. The complaint also alleged that the defendants failed to disclose that at least $5.8 million of the proceeds was transferred to foreign gold-mining companies.

In January 2022, the court entered judgment against the defendants, with their consent, for violations of the Securities Exchange Act and the Securities Act. That judgment required disgorgement—repayment of ill-gotten gains—and prejudgment interest, and provided that the complaint’s allegations would be treated as true for purposes of deciding the SEC’s later motion for disgorgement and civil penalties.

Disgorgement

The SEC argued that the defendants should disgorge the full $33,499,206.21 raised through the token sale because the entire amount came from a fraudulent offering. Alternatively, it identified $13,748,904.94 in expenses as expenses that were not clearly connected to the fraudulent scheme and could potentially be deducted.

The defendants claimed that they had incurred legitimate project expenses and had not made a profit. The court rejected the argument that the absence of net profit automatically barred disgorgement. Applying the rule that disgorgement generally must be limited to net profits, while excluding expenses that furthered the fraud, the court concluded that the defendants’ business was not entirely a sham and allowed some legitimate operating expenses to be deducted.

The court deducted $13,748,904.94 in expenses that the SEC did not specifically contest. It did not deduct marketing, consulting, token-minting, or other expenses used to further the unregistered and fraudulent offering. It also rejected deductions for cryptocurrency depreciation and $732,354.54 in accrued expenses because the defendants had not shown that those amounts were actually paid.

The court allowed deductions for $73,900 in legal fees related to advice about the token sale. It rejected deductions for fees incurred defending an investor’s arbitration claim and the SEC investigation, but found the specified legal expenses for advice concerning the offering to be legitimate.

The court separately held that Metavine Pty. Ltd. had received at least $5 million in transfers from the other entities and had no legitimate claim to those investor funds. It therefore ordered Metavine Pty. Ltd. to disgorge $5 million, plus prejudgment interest.

Civil penalties

The SEC sought a $1,116,140 third-tier civil penalty from each of Crowd Machine, Inc. and Metavine, Inc. The defendants requested at most a first-tier penalty of $50,000. The court concluded that a third-tier penalty was appropriate because the defendants admitted fraudulent conduct and deliberate or reckless disregard of regulatory requirements that caused substantial investor losses.

After considering the relevant penalty factors—including the defendants’ knowing misrepresentations, the repeated acts surrounding the offering, investor losses of nearly $33.5 million, cooperation with the investigation, recognition of wrongdoing, and claimed inability to pay—the court declined to impose the statutory maximum. It ordered Crowd Machine, Inc. and Metavine, Inc. each to pay a $600,000 civil penalty.

Disposition

The court granted in part and denied in part the SEC’s motion. It held the defendants jointly and severally liable for $19,676,401.27 in disgorgement plus prejudgment interest. It held Metavine Pty. Ltd. jointly and severally liable for $5 million in disgorgement plus prejudgment interest. Crowd Machine, Inc. and Metavine, Inc. were each ordered to pay $600,000 to the SEC within 14 days after entry of the order. The SEC was ordered to provide the prejudgment-interest figures and payment instructions within seven days so that a final disgorgement order could be entered. The court retained jurisdiction over any distribution of the funds.