The SEC accuses Justin Sun and eight celebrities of violating securities laws. The full text also sends a Wells notice to Coinbase

On March 22, 2023, the U.S. Securities and Exchange Commission announced charges against Justin Sun and his three wholly-owned companies, Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (formerly BitTorrent), for unregistered offering and selling of crypto asset securities Tronix (TRX) and BitTorrent (BTT).

The SEC also charged Sun and his companies with fraudulently manipulating the secondary market for TRX through extensive wash trading, which involves the simultaneous or near-simultaneous purchases and sales of a security to make it appear that trading is active, but actual beneficial ownership does not change, and an elaborate scheme to pay celebrities to peddle TRX and BTT without disclosing their compensation.

The SEC also charged the following eight celebrities with illegally peddling TRX and/or BTT without disclosing the compensation they received and the amount of compensation.

• Lindsay Lohan

• Jake Paul

• DeAndre Cortez Way (Soulja Boy)

• Austin Mahone

• Michele Mason (Kendra Lust)

• Miles Parks McCollum (Lil Yachty)

• Shaffer Smith (Ne-Yo)

• Aliaune Thiam (Akon)

The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, alleges that Justin Sun and his companies offered and sold TRX and BTT as investments through multiple unregistered “bounty programs” that directed parties to promote the tokens on social media and recruit others to join Tron-affiliated Telegram and Discord channels and create BitTorrent accounts in exchange for allocations of TRX and BTT. The complaint further alleges that Sun, the BitTorrent Foundation, and Rainberry offered and sold BTT in unregistered monthly airdrops to investors, including in the United States, who purchased and held TRX on Tron wallets or participating crypto asset trading platforms. According to the complaint, these unregistered offers and sales violated Section 5 of the Securities Act.

The Commission also alleges that Sun violated the antifraud and market manipulation provisions of the federal securities laws by orchestrating a scheme to artificially inflate apparent trading volume of TRX in the secondary market. From at least April 2018 through February 2019, Sun allegedly directed his employees to conduct more than 600,000 wash trades of TRX between accounts on two crypto asset trading platforms that he controlled, with wash trades of between 4.5 million and 7.4 million TRX per day. The scheme required a large supply of TRX, which Sun allegedly provided. Sun also allegedly sold TRX into the secondary market, reaping $31 million in proceeds from the illegal, unregistered token offering and sale.

"This case demonstrates once again the heightened risks investors face when crypto-asset securities are offered and sold without proper disclosure," said SEC Chairman Gary Gensler. "As alleged, not only did Justin Sun and his companies target U.S. investors in their unregistered offers and sales, generating millions in illicit gains at investors’ expense, but they also coordinated wash trading on an unregistered trading platform to create the misleading appearance of active trading of TRX. Sun further induced investors to purchase TRX and BTT by orchestrating a publicity campaign in which he and his celebrity promoters concealed the fact that the celebrities were paid to post their tweets."

“While we are neutral on controversial technologies, we are anything but neutral when it comes to investor protection,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As alleged in the Complaint, Justin Sun and others exploited an age-old game to mislead and harm investors by first offering securities without complying with registration and disclosure requirements and then manipulating the market for those securities. At the same time, Justin Sun paid celebrities with millions of social media followers to peddle the unregistered offerings while specifically instructing them not to disclose their compensation. This is exactly the kind of conduct that the federal securities laws are designed to protect, regardless of the labels Justin Sun and others use.”

In addition to Cortez Way and Mahone, the celebrities charged today agreed to pay penalties, interest and fines totaling more than $400,000 to resolve the charges without admitting or denying the SEC’s findings.