Australian cryptocurrency entrepreneur Craig Sproule has been charged by the US corporate watchdog for defrauding investors by diverting millions from a digital coin offering to South African gold mining investments.
Mr Sproule and two companies he founded – Crowd Machine Inc and Metavine Inc – have been charged with making materially false and misleading statements when selling digital asset securities, according to the US Securities and Exchange Commission.
Mr Sproule, who lives in California but was born in Lismore in northern NSW, has been ordered to pay a $US200,000 ($280,000) civil penalty, and will face a ban from serving as a company director, while Crowd Machine’s digital tokens will be banned from crypto trading platforms.
The San Jose-based Crowd Machine was aimed at creating a blockchain replacement for Amazon Web Services, the cloud-based computer infrastructure, with a distributed system.
To achieve this, Mr Sproule, who referred to himself on social media as the “Man behind the Machine”, claimed to have raised $US40.7 million through an initial coin offering of Crowd Machine Compute Tokens (CMCT) in early 2018 that was earmarked to fund a decentralised computer network.
Instead, Mr Sproule plunged $US5.8 million into gold mining entities in South Africa, a fact never disclosed to Crowd Machine token investors.
The raising was also “fraudulent and unregistered”, according to documents lodged in court by the SEC.
None of the $US5.8 million has been recovered, and the South African gold mining operations “have returned no revenue”, the SEC’s statement of claim said.
Malaysian gold miner caught up
Mr Sproule promoted the CMCT token through “messaging applications, like Telegram, and on social media platforms hosted in and accessible to users in the United States, including Facebook, Twitter, Medium and YouTube”.
While Mr Sproule targeted pools of retail investors for the raising, the biggest investment was purportedly $US7.25 million from a Malaysian gold mining company.
However, only $US250,000 was actually collected from this investor, with the rest extended to the miner in credit that was never received, according to the SEC.
While Crowd Machine spruiked that its token could be worth up to $US600, most investors paid between US3¢ and US22¢ per coin. The market value never rose above US18¢ a token.
Hack target
Crowd Machine also told investors its technology had been “battle tested” by Fortune 500 companies such as General Electric, and that it had a “live, commercial product” that stood the company apart from other crypto token manufacturers.
“In reality, none of the technology related to the Crowd [Machine] was functional, and the only technology that had been ‘battle tested’ by any third parties was Metavine Inc’s existing application development software,” the SEC said.
In September 2018, Crowd Machine was the subject of a hack that targeted the company’s crypto wallet and led to the loss of more than 1 billion CMCT tokens. The hack triggered an 87 per cent plunge in the cryptocurrency’s price. At the time, Mr Sproule said he was working with unnamed authorities to investigate the issue.
The SEC has filed a lawsuit in the Northern District of California, charging Mr Sproule and Crowd Machine with breaches of anti-fraud and registration provisions in securities laws.
Although Mr Sproule and Crowd Machine have neither admitted nor denied the allegations, they have consented to a ban from dealing in future securities offerings and agreed to remove CMCT tokens from trading platforms. Mr Sproule will also be banned from being an officer or director of a public company.
“Sproule and Crowd Machine misled investors about how they were using ICO proceeds, spending funds on an entirely unrelated scheme,” said SEC chief cyber unit enforcer Kristina Littman.
“We will continue to hold accountable issuers of digital asset securities who fail to provide fulsome and truthful disclosure to the public.”
Along with Mr Sproule and Crowd Machine, another entity registered in Australia, Metavine Pty Ltd, has committed to footing the bill for any future civil penalties relating to Crowd Machine. An application for voluntary deregistration of Metavine was filed with the Australian Securities and Investments Commission registry in December.
Read full story on The Australian Financial Review