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.