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Just a Drop in the Bucket: SEC Charges Dropil with Defrauding Investors in Unregistered ICO

The SEC recently filed suit against Dropil, Inc. (“Dropil”), Jeremy McAlpine, Zachary Matar, and Patrick O’Hara, alleging the defendants had defrauded investors in an unregistered offerings of securities described by the defendants as an initial coin offering (“ICO”).[1] An ICO is a form of offering of digital assets that are securities that are used to raise capital from potential investors.  The SEC has brought and settled a number of enforcement actions involving ICOs. 

According to the SEC’s complaint, Dropil sold roughly $1.8 million of its DROP digital assets which appear to be illegally offered securities that were described by Dropil as “tokens”.  The DROP tokens were sold to thousands of investors between January and March 2018. Dropil informed investors of their plan to pool investor funds in order to trade various digital assets via a purported “trading bot” named Dex. Investors were told Dex would use Dropil’s proprietary trading algorithm. Under Dropil’s plan, as Dex’s trades realized profits, investors would receive compensation every fifteen days in the form of additional DROP tokens. Unfortunately for investors, there is no record that Dex ever operated or generated any trading profits.

The SEC got the “drop” on Dropil after its investigation found that Dropil used investor money for other projects and diverted funds into the founders’ own digital asset accounts. Of the $1.9 million raised, approximately $1.4 million was transferred to the founders’ personal digital asset accounts. To disguise its dealings, Dropil allegedly falsified profitability reports, and misrepresented volume and dollar amount of DROP tokens sold, both pre and post-ICO.

Dropil and its founders are charged with selling securities without a registration or an exemption from registration in violation of Section 5 of the Securities Act of 1933, the antifraud provisions of Section 17(a) of the Securities Act, and fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains, prejudgment interest, penalties, and injunctive relief.

Unfortunately for Dropil and its founders, it is unlikely the SEC will drop this case anytime soon.

[1] Securities and Exchange Commission v. Dropil, Inc., Jeremy McAlpine, Zachary Matar, and Patrick O'Hara, No. 8:20-cv-00793 (C.D. Cal., filed April 23, 2020), AVAILABLE AT: https://www.sec.gov/litigation/litreleases/2020/lr24804.htm and https://www.sec.gov/litigation/complaints/2020/comp24804.pdf.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 132

TRENDING LEGAL ANALYSIS


About this Author

Shareholder

Richard Levin brings his experience as a senior legal and compliance officer on Wall Street and in London to bear in advising clients on corporate, securities and regulatory issues. A problem-solver by nature, his practice focuses on helping financial services and technology (FinTech) clients identify and address regulatory issues as they build their businesses.  

The FinTech sector is experiencing rapid changes that are producing innovative new technologies: digital currencies, blockchain technology, peer to peer lending, robo advisors, crowdfunding portals, and...

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Stephen A. Rutenberg Shareholder Polsinelli New York Bankruptcy and Financial Restructuring Bankruptcy Litigation Capital Markets ,Commercial Lending ,Debt and Claims Trading, Financial Services, Insolvency, Financial Technology FinTech and Regulation
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Stephen Rutenberg’s practice focuses on the intersection of special situations investing and FinTech including cryptocurrency and blockchain technology. 

A significant component of Stephen’s practice relates to his work in the distressed debt market, representing clients in the purchase and sale of loans and securities of distressed and bankrupt companies. Recent representations include advising on the purchase, sale and financing of bankruptcy trade claims in several major chapter 11 cases, including Lehman Brothers, and the MF Global and Icelandic bank liquidations. He works with all types of clients, specifically, asset managers, hedge funds, private equity firms, and global financial institutions that seek him out for his legal understanding, business sense, responsiveness, and care for client needs. 

Together with the other lawyers in Polsinelli’s renowned FinTech and Regulation practice, Stephen represents, investors, issuers and underwriters looking for market leading perspectives,  on cutting edge utilization of blockchain technology including investing in cryptocurrency and initial coin offerings (ICO’s). 

Stephen has experience with general financings, lending, and other corporate transactions. He has also counseled clients in the negotiation of total return swaps, credit default swaps, and other structures for the purchase and/or financing of loan and claim portfolios as well as formation and structuring work for startup companies and funds.
 

Admitted to practice in New York and as a solicitor in England and Wales, Stephen has significant experience advising on cross-border distressed trading matters and is recognized for this in the 2016 edition of IFLR1000as a Rising Star. In February 2017, Stephen received the UJA-Federation of New York’s James H. Fogelson Emerging Leadership Award for his contributions to the New York legal and philanthropic communities. Stephen is recognized as a thought leader frequently writing and speaking on the FinTech and distressed loan trading.

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Paul Roshka, Polsinelli, financial securities lawyer
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Known for his thorough preparation and persistence, Paul Roshka has a national practice representing companies, their directors, officers, and employees during investigations and enforcement/disciplinary proceedings involving potential violations of the federal and state securities laws, and other financial regulatory statutes and rules. He has handled matters initiated by almost every SEC Regional Office and FINRA District Office, and their Home Offices in Washington, D.C.

He is also a recognized bet-the-company litigator. Paul has defended securities/financial...

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T.J. Mitchell Commercial Litigation Lawyer Polsinelli Law Firm
Associate

Thomas (T.J.) Mitchell is an associate in the Commercial Litigation practice group. T.J. partners with Polsinelli’s seasoned attorneys to provide litigation solutions in complex financial and business disputes, manage clients’ risk, and allow clients to focus on driving their business or personal objectives. Drawing from his experience working in the legal department of a large technology company, T.J. understands what clients expect from their outside counsel or personal attorney and takes the time to understand their unique challenges, goals, and values. These priorities shape his work...

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