The California Department of Financial Protection and Innovation (DFPI) announced a series of desist-and-refrain orders against 11 different entities for violation of state securities laws.
Each of the 11 entities allegedly offered and sold unqualified securities and ten of them also allegedly made material misrepresentations and omissions to investors. Nine of these entities are accused of soliciting funds from investors to trade crypto assets on behalf of the investors. One of the entities allegedly solicited crypto assets to develop metaverse software and one entity claimed to be a decentralized finance platform.
The entities are all alleged to have used investor funds to pay purported profits to other investors, in the manner of a Ponzi scheme and operated referral programs in the manner of a pyramid scheme. The entities promised to pay investors commissions if they recruited new investors, and additional commissions if the investors that they recruited, in turn, recruited new investors. The referral programs achieved their desired effect, incentivizing investors to create and post content to social media websites to entice others to invest in these entities.
“The DFPI will continue to protect California consumers and investors from crypto scams and frauds,” DFPI Commissioner Clothilde Hewlett said. “These actions not only protect consumers, but also ensure California remains the premier global location for responsible crypto asset companies to start and grow.”
On May 4, 2022, Gov. Gavin Newsom signed an executive order to foster responsible innovation, bolster California’s innovation economy and protect consumers. The executive order, among other things, directed the DFPI to initiate enforcement actions to stop violations of relevant consumer financial laws and to increase Californians’ awareness of the benefits and risks associated with crypto asset-related financial products and services.