The Wild West of Initial Coin Offerings Knocks Out Floyd Mayweather

  • Centra raised $32 million via an ICO promoted by Floyd Mayweather
  • Digital currencies Bitcoin and Ethereum are down more than 45% year-to-date

Floyd Mayweather’s money team may be looking for a new endorsement deal, after the co-founders of Centra an Initial Coin Offering (ICO) were arrested on fraud charges. Centra raised $32 million from investors and sold unregistered investments through a "CTR Token," the Securities and Exchange Commission alleged. Should the SEC enact securities laws for ICOs and cryptocurrency exchanges?

Why This Matters: Cryptocurrencies are notoriously volatile. Centra (CTR) plummeted nearly 70% to $0.10 after news broke, according to data from CoinMarketCap. The company used intricate marketing campaigns, including paid endorsements from celebrities such as Floyd Mayweather and DJ Khaled to attract investors. Also, the co-founders allegedly created fictional executives and lied about relationships with Visa  (V +0.93%) and MasterCard  (MA +0.38%). Social networking sites like Google (GOOGL +1.00%), Facebook (FB +0.46%), and Twitter (TWTR -0.32%) have banned ads related to the digital tokens.

What’s an ICO? It’s a process company’s use to issue a new digital coin in exchange for money. Creators of new digital currencies sell a certain amount of the currency, usually before they’ve finished the software and technology that underpins it. The idea is investors can get in early while giving developers the funds to finish the tech. These offerings have traditionally operated outside the regulatory framework meant to protect investors, although that’s starting to change as more governments examine the practice. Bitcoin, Ethereum and other blockchain-based projects have raised funds through this controversial practice. The top three major cryptocurrencies are Bitcoin (BTC), Ethereum (ETH) and Ripple (XRP). All of these currencies suffered major losses during the first quarter of the year down 48%, 47% and 77% respectively according to Coinmarketcap.com.

Situational Awareness: Neither Mayweather nor DJ Khaled were named in the suit, though both were named “official brand ambassador and managing partner” at Centra. The SEC has previously warned celebrities about endorsing ICOs without proper disclosure around the nature and amount of their compensation. In March the SEC clarified it is looking to apply securities laws to cryptocurrency exchanges and wallets.

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