Securities and Exchange Commission v. Coinseed, Inc.

Background

The Securities and Exchange Commission (SEC) brought an enforcement action against Coinseed, Inc. and Delgerdalai Davaasambuu under Sections 5(a) and 5(c) of the Securities Act. The SEC alleged that the defendants offered and sold about $141,410 worth of CSD tokens without registering the offering and without providing the material information required when soliciting the public.

The complaint alleged that Davaasambuu founded Coinseed in 2017 and served as its chief executive officer. Coinseed marketed a mobile application that automatically rounded up users’ purchases and invested the difference in digital assets. The defendants offered CSD tokens in two rounds, advertised the offering through their website, social-media accounts, and press releases, and told potential investors that token purchasers would receive a monthly share of profits. The complaint alleged that proceeds would be used to grow and expand Coinseed. The defendants ultimately raised at least $141,410 from hundreds of investors.

Default and Referral for Damages

The defendants did not respond to the complaint after their counsel withdrew. The Clerk issued certificates of default, and the SEC moved for a default judgment. Neither defendant responded to that application or appeared at the August 19, 2021 default hearing.

On August 23, 2021, the court entered an order of default and permanently restrained and enjoined the defendants from, among other things, violating Section 5 of the Securities Act. The court referred the matter to Magistrate Judge Sarah Netburn to determine the appropriate repayment and civil-penalty amounts.

Magistrate Judge’s Recommendation

Judge Netburn issued a Report and Recommendation (R&R) on January 30, 2023. She concluded that the complaint alleged sufficient facts to establish that the defendants sold an unregistered security and failed to register the CSD offering. Because of the default, the complaint’s properly pleaded factual allegations were accepted as true, except allegations concerning damages.

Judge Netburn recommended disgorgement—repayment of money obtained through unlawful conduct—of $141,410, plus prejudgment interest. She recommended that Coinseed and Davaasambuu be jointly and severally liable, meaning the SEC could collect the full amount from either defendant, subject to the rules governing collection of a judgment. She recommended that interest be calculated from June 1, 2018, using the lower of the average London Interbank Offered Rate or the Internal Revenue Service underpayment rate for each year.

She also recommended a $141,410 civil monetary penalty against each defendant. The R&R stated that these penalties were reasonable in light of the alleged Securities Act violations and the defendants’ failure to defend against the action.

District Court’s Review and Ruling

Because no party objected to the R&R, Judge Gardephe reviewed it for clear error on the face of the record rather than conducting the more extensive review that would follow timely objections. The court found the R&R thorough, well reasoned, and free of clear error.

Judge Gardephe therefore adopted the R&R in its entirety. The defendants were held jointly and severally liable for $141,410 in disgorgement plus prejudgment interest, and each defendant was ordered to pay a $141,410 civil monetary penalty. The Clerk was directed to enter judgment and close the case.