The Centra Tech Debacle and Ways to Avoid a Fraudulent ICO

Centra Tech, Inc. Where to begin? To say the least, it appears that the co-founders either attempted to pull off a massive gotcha on its investors, or perhaps they simply bit off more than they could chew with their promises. One thing is certain, they are in for a ride, not only from the SEC but federal prosecutors as well.

If you haven’t heard, two co-founders of Centra Tech, a Miami based start-up company, are being sued by the SEC for violation of the anti-fraud and registration provisions of federal securities laws. The SEC recently amended its complaint to include a third co-founder as a Defendant as well. According to the SEC, the Centra Tech co-founders orchestrated a fraudulent scheme to mislead investors by promising to use funds raised in its unregistered ICO to build a suite of financial products that do not exist. The co-founders allegedly touted its relationship with Visa and MasterCard, promising to create a debit card that would instantly convert cryptocurrencies into U.S. Dollars for easy spending. However, according to the SEC, no such relationship existed. The SEC also claims that the co-founders fabricated fictional executives with impressive bios, posted false or misleading marketing materials, and recruited celebrities to promote the ICO on social media.

Author and intellectual Rabbi Lord Jonathan Sacks once said, “The single most important distinction in life . . . is to distinguish between an opportunity to be seized and a temptation to be resisted.”

It is all too easy to get swept up in the frenzy of the monstrous gains to be made in the crypto market, but there is also something to be said for due diligence. So I’m going to suggest 5 initial steps you should take before investing in an ICO, specifically one being offered in the United States.

  1. Ask to see white pages. There should be a clear business plan explaining how the raised capital will be used, and what rights you have with your purchase, whether you can get a refund or sell your token, etc. Avoid a white paper with a complex yet vague explanation of the investment opportunity.
  2. Research whether it is registered. You can find information on registered offerings on SEC.com through EDGAR. If the offering is not registered, ask what exemption it is relying on. If it is relying on an exemption, be wary of investing in an ICO unless you are an accredited investor.
  3. Look for Know Your Customer (“KYC”) information on the company’s website. Most ICO’s will be considered a “security,” and therefore subject to SEC regulation. Again, if the company is relying on a registration exemption, they will be subject to strict limitations as to who can invest.
  4. Research the credentials of the founders and directors. It is important to know whether the team behind the project consists of individuals who are known in the industry, or if they have been involved in other projects, which may lend credibility to the offering.
  5. Be wary of red flags such as the follows: massive bonuses, promises of guaranteed or inflated returns, advertisements full of meaningless blockchain terminology, promises of unrealistic enticing new technology, and celebrity endorsements.

The steps listed above are helpful when you begin researching a potential ICO investment, but by no means are these replacements for due diligence with your attorneys and accountants. Because this sector is so vulnerable to fraud it is particularly important to take your time before risking your funds.