Cease-and-desist orders were filed against 11 lesser-known crypto companies this week, by the California Department of Financial Protection and Innovation (DFPI). The Department announced its actions on Twitter, stating that the crackdown on “crypto asset fueled fraudulent schemes” is designed to “protect consumers and ensures that California remains the premier global location for responsible crypto asset companies to start,” according to DFPI Commissioner Clothilde Hewlett.
The DFPI press release goes into detail about the allegations. According to DFPI, each of the 11 entities allegedly offered and sold unqualified securities, and ten of them also made material misrepresentations and omissions to investors. Nine of these entities solicited funds from investors to purportedly trade crypto assets on behalf of the investors. One of the entities solicited crypto assets to develop metaverse software, and one entity claimed to be decentralized finance, or DeFi, platform.
The entities are all alleged to have used investor funds to pay purported profits to other investors in the manner of a Ponzi scheme. Furthermore, each of the entities had a referral program that operated in the manner of a pyramid scheme. The entities promised to pay investors commissions if they recruited new investors and additional commissions if the investors they recruited, in turn, recruited new investors. The referral programs achieved their desired effect, incentivizing investors to create and post content to social media websites, such as YouTube, to entice others to invest in these entities.
The firms the department targeted are classic examples of High-Yield Investment Programs (HYIPs). These investment frauds offer high yields with low risk and overly consistent returns. Investors are cautioned to learn about HYIPs and be aware of the red flags. Concerned citizens can learn about HYIPs on the California Department of Financial Protection website (https://dfpi.ca.gov/2022/08/18/hyips-dont-get-scammed/).
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