The US Securities and Exchange Commission (SEC) has filed charges against Justin Sun, a prominent entrepreneur in the crypto asset space, and three of his companies – Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (formerly BitTorrent) – for violating securities laws through the unregistered sale and offering of crypto asset securities, namely Tronix (TRX) and BitTorrent (BTT). The SEC has also accused Sun and his companies of engaging in fraudulent activity by manipulating the secondary market for TRX through extensive wash trading and paying celebrities to promote TRX and BTT without disclosing their compensation.
In addition to the charges against Sun and his companies, the SEC has also charged eight celebrities, including Lindsay Lohan, Jake Paul, and Akon, for illegally promoting TRX and/or BTT without disclosing that they were compensated for doing so and the amount of their compensation.
According to the SEC’s complaint filed in the US District Court for the Southern District of New York, Sun and his companies offered and sold TRX and BTT through multiple unregistered “bounty programs” that directed interested parties to promote the tokens on social media, recruit others to Tron-affiliated Telegram and Discord channels, and create BitTorrent accounts in exchange for TRX and BTT distributions. The complaint further alleges that Sun, BitTorrent Foundation, and Rainberry offered and sold BTT in unregistered monthly airdrops to investors, including in the US, who purchased and held TRX in Tron wallets or on participating crypto asset trading platforms. These unregistered offers and sales violated Section 5 of the Securities Act, according to the complaint.
The SEC also alleges that Sun violated federal securities laws by orchestrating a scheme to artificially inflate the apparent trading volume of TRX in the secondary market through more than 600,000 wash trades of TRX between two crypto asset trading platform accounts he controlled from at least April 2018 to February 2019, with between 4.5 million and 7.4 million TRX wash traded daily. Sun allegedly provided the significant supply of TRX required for this scheme and generated $31 million from illegal, unregistered offers and sales of the token.
SEC Chair Gary Gensler warned investors of the high risks associated with crypto asset securities offered and sold without proper disclosure, adding that Sun and his companies not only targeted US investors in their unregistered offers and sales but also coordinated wash trading to create the misleading appearance of active trading in TRX. Sun further induced investors to purchase TRX and BTT by orchestrating a promotional campaign in which he and his celebrity promoters hid the fact that the celebrities were paid for their tweets.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized the importance of investor protection and stated that Sun and his accomplices mislead and harm investors by first offering securities without complying with registration and disclosure requirements and then manipulating the market for those very securities. With the exception of two of the celebrities charged, the other six have agreed to pay a total of more than $400,000 in disgorgement, interest, and penalties to settle the charges without admitting or denying the SEC’s findings.
The SEC’s investigation was conducted by Adam B. Gottlieb, Ann Rosenfield, John Lucas, and John Marino and supervised by Paul Kim, Michael Brennan, Jorge G. Tenreiro, and David Hirsch. The SEC’s litigation will be led by Timothy Halloran and Mr. Gottlieb, under the supervision of Melissa Armstrong.
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