Securities and Exchange Commission v. Middleton, No. 1:19-cv-04625

On November 1, 2019, the SEC issued a final judgment as to Veritaseum, Inc., Veritaseum, LLC, and their founder (Reginald Middleton) concerning the defendants’ conduct with respect to an ICO and the manipulation of cryptocurrency. The order was part of a settlement between the defendants and the SEC.

Reginald Middleton formed Veritaseum, Inc., in 2014 and Veritaseum, LLC, in 2017 to develop software that permitted “peer to peer exchanges of value” using a blockchain. From April 25, 2017, to May 26, 2017, the defendants conducted an ICO of tokens called “VERI Tokens,” “VERI” or “Veritas.” The defendants also engaged in post-ICO sales of VERI Tokens from May 26, 2017, to February 2018. In total, those sales raised proceeds worth approximately US $14.8 million.

The SEC alleged that the VERI Tokens were securities and that the sale of those tokens were unregistered securities offerings because the claimed functionality of the VERI Tokens did not exist at the time of the ICO. Rather, the defendants stated that the money paid for the tokens would be pooled into a common enterprise, which would generate profits based on the defendants’ managerial expertise and efforts following the close of the ICO.

The SEC also alleged that the defendants made a series of material misrepresentations concerning Veritaseum, the use of the ICO proceeds, investor demand for VERI Tokens, and the existence of a market-ready product. In addition, the SEC alleged that Mr. Middleton misappropriated funds raised in the ICO for his own use and engaged in manipulative trades that artificially inflated the value of VERI Tokens. Specifically, one week after the ICO, Mr. Middleton allegedly misrepresented to investors that hackers had stolen 36,000 tokens with an approximate value of US $8 million.

When the SEC informed the defendants’ counsel that it was going to take enforcement action, the defendants transferred and used more than US $2 million of the ICO proceeds the next day. The SEC then filed a complaint against the defendants, alleging that the defendants sold unregistered securities in violation of Sections 5(a) and (c) of the Securities Act; made material misrepresentations concerning the ICO in violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act; and manipulated the value of VERI Tokens in violation of Section 9(a)(2) of the Exchange Act. The SEC sought a temporary restraining order that (among other things) froze all of the defendants’ assets and appointed a third-party to escrow all of the defendants’ digital assets.

The final judgment entered as part of the settlement (1) enjoined the defendants from violating Sections 5 and 17(a) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act; (2) barred Mr. Middleton from acting as a director or officer of any issuer registered with the SEC; (3) prohibited the defendants from engaging in any offering of digital securities; and (4) required the defendants to disgorge approximately US $7.9 million in profits and pay approximately US $580,000 in prejudgment interest and Mr. Middleton himself to pay a US $1 million monetary penalty. Those amounts were to be paid into a fair fund to compensate the victims of the defendants’ fraud.