On 24 September 2024, the U.S. Securities and Exchange Commission (US SEC) initiated a complaint against TrueCoin LLC and TrustToken Inc. for allegedly engaging in fraudulent practices and the unregistered sale of securities. The companies were involved in the issuance and promotion of TrueUSD (TUSD), a stablecoin, and operated the TrueFi lending protocol, which provided investment opportunities in the crypto space. The US SEC’s complaint highlighted that from November 2020 to April 2023, the companies misled investors by falsely claiming that TUSD was fully backed 1:1 by U.S. dollars. In reality, a substantial portion of the assets backing TUSD had been invested in a speculative offshore fund, posing significant undisclosed risks. Additionally, the SEC alleged that TrueCoin and TrustToken failed to register their offerings as required under federal securities laws, thus violating key provisions of the United States Securities Act of 1933.
The complaint against TrueCoin LLC and TrustToken Inc., accuses the companies of defrauding investors and conducting unregistered offerings of securities. According to the US SEC, between November 2020 and April 2023, TrueCoin and TrustToken sold investment contracts tied to TUSD and provided profit-making opportunities through the TrueFi protocol. TUSD was marketed as a stablecoin, which the companies claimed was fully backed by U.S. dollars on a 1:1 basis. US SEC found that a significant portion of the assets purportedly backing TUSD had been invested in a speculative offshore commodity fund, exposing investors to undisclosed risks. By March 2022, more than US $500 million of TUSD reserves were invested in this fund, with the companies continuing to market the stablecoin as fully backed by U.S. dollars. Despite being aware of liquidity and redemption issues at the offshore fund by the fall of 2022, the companies allegedly continued to make misleading statements about TUSD’s security. By September 2024, 99% of the reserves backing TUSD were invested in the speculative fund, leading to further concerns about investor protection.
The US SEC’s complaint alleges that TrueCoin and TrustToken violated provisions of the Uited States Securities Act of 1933. First, the companies were charged with breaching Sections 5(a) and 5(c) of the US Securities Act, which require issuers to register offers and sales of securities with the SEC unless an exemption applies. The SEC argued that TUSD and the investment contracts related to TrueFi constituted securities under U.S. law, as they involved the investment of money in a common enterprise with the expectation of profits derived from the efforts of others. By failing to register these securities with the SEC, TrueCoin and TrustToken engaged in the illegal sale of unregistered securities. Furthermore, the US SEC alleged violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, which prohibit fraud in the offer and sale of securities. These sections focus on misstatements and omissions of material facts that mislead investors. The SEC contended that both companies made false claims about TUSD’s backing, giving investors the impression that their investments were secure when, in reality, a substantial portion of the reserves was tied to a high-risk offshore fund. This lack of transparency about the true nature of the investments backing TUSD constituted fraudulent activity under federal securities laws.
The SEC’s investigation into TrueCoin and TrustToken was conducted by the Crypto Assets and Cyber Unit, a specialised division tasked with examining issues related to digital assets and blockchain technology. The team, led by investigators Michael J. Friedman, Michael C. Baker, Pasha Salimi, and Bryan Hsueh, uncovered evidence of misconduct, including the companies’ misrepresentations about TUSD’s backing and their failure to register their offerings as required by federal securities laws. The investigation revealed that TrueCoin and TrustToken had continued to make false statements about TUSD’s security, even after becoming aware of liquidity issues at the offshore fund where much of the TUSD reserves were invested. These misleading claims led investors to believe that TUSD was still fully backed by U.S. dollars, when in fact the vast majority of the reserves were tied to a speculative and high-risk investment.
The SEC’s investigation revealed that although the two companies were legally separate, they acted in concert during the relevant period, sharing common ownership and management. Both companies marketed TUSD as a secure and trustworthy investment. After the operations of TUSD were sold to an offshore entity in December 2020, TrueCoin continued to be involved in TUSD’s management, including minting and redeeming the stablecoin, performing know-your-customer checks, and ensuring regulatory compliance.
The US SEC’s investigation is ongoing, and the case serves as a broader part of the agency’s efforts to regulate the decentralised finance (DeFi) space and protect investors from fraudulent activity in the crypto sector.
(Source: https://www.sec.gov/newsroom/press-releases/2024-145, https://www.sec.gov/files/litigation/complaints/2024/comp-pr2024-145.pdf)
