Pre-existing, Substantive Relationships and General Solicitation

As cryptocurrency issuance declines, the Securities and Exchange Commission is continuing to clean out the fraud, mis-steps, and foolishness of coin promoters. These actions have carried over to the services and investment managers involved in coin offerings.

Usman Majeed wanted to make his money by running a fund that invests in cryptocurrency. He ran into the same mistakes and ignorance of the securities laws that coin promoters stumble over. His platform was Mutual Coin Fund, with an approach that is “purely quantitative and involves algorithmic trading with intense backtesting…” and develops “new trading strategies involving artificial intelligence and machine learning through neural networks.”

That sounds like a lot of the same gobbley-gook for a crypto-fund offering that you hear for a coin offering.

That aside, he still managed to raise over $500,000 from investors from August 2017 to May 2018. Then managed to lose 62% of it by March 2019.

From the SEC order, it sounds like enforcement decided to focus on the marketing failure. Mr. Majeed and the fund didn’t have a pre-existing, substantive relationship with the investors. The fund engaged in general solicitation through its website and media interviews.

The fund could have engaged in general solicitation if it checked the 506(c) box on its Form D. But it checked the 506(b) box.

Of course, with 506(c) the fund would have needed to take reasonable steps to confirm that investors were accredited investors. But at least one investor was not accredited according to the SEC order.

Sources:

Author: Doug Cornelius

You can find out more about Doug on the About Doug page

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