Is Substratum a Security and Did Substratum Commit Securities Fraud?

Substratum passes the Howey Test, has advertised cuuret/past clients with Apple, HP, Facebook, the NBA, and CEO engages in price manipulation

Substratum conducted its first initial fundraiser on August 14th, 2017 and it concluded on September 17th, 2017. The team raised $13.8 million from the public, of which non accredited investors were allowed to contribute without providing AML/KYC information. This was done over the premise that the Substratum token was not a security “if the token/coin has a purpose as part of a platform or system”.

Taken from the Substratum Whitepaper v1 for full context U.S. participation was allowed due to the following:

“ The Securities and Exchange Commission recently made a filing that most coins need to be registered as a commodity to run an ICO for US citizens. The exception to that rule is if the token/coin has a purpose as part of a platform or system. If it is used as the FUEL that runs the system. Since Substrate is the FUEL that runs the Substratum Network we are cleared to run for US Citizens”.

Is SUB a Security?

Substratum had an ICO, were based in the U.S. and also took in funds from non accredited investors without KYC/AML enforcement. Also, there is no blockchain based network launched, therefore the tokens are still to this day considered “pre-functional” tokens which are likely securities.

Howey Test Origins

The Howey Test was created by the Supreme Court to determine whether certain transactions qualify as “investment contracts”. If they do so, under the Securities Act of 1933 and the Securities Exchange Act of 1934, those transactions are considered securities and therefore subject to U.S. securities laws.

Some background on how the Howey Test originated came from the SEC v. Howey Co. court case, where Howey was the name of an agricultural company in South Florida. People came down to South Florida and actually had the opportunity to buy acres and half acres in this agricultural company.

Essentially, what Howey said to the people was: “Come on down and you’ll see all these citrus trees, we’re going to fertilize, we’re going to harvest them, we’re going to package it, we’re going to sell it, and we’re going to make a PROFIT, and we’re even going to share that profit with you and you can use that profit to make the payments on your land”.

One thing eventually led to another and Howey Agricultural went bankrupt. Surprisingly the one asset they had were all the seller backed financier arrangements on all the acreages on their farm. So naturally, they wanted to collect on all these notes to pay off debt.

When they went to collect on it, investors became infuriated because they were sold land but only bought it because Howey was running this Agricultural business. In turn, their sole reason for investing in Howey was because they told investors they would make a profit and they could use that money to pay for the land they bought from Howey.

So, since the company was not running anymore, how could all these investors make the payments for the land they bought?

What resulted from this case now gives us a blueprint to how securities can be identified and the regulation they must undergo in accordance to U.S. Securities laws.

Does Substratum Pass the Howey Test?

The common argument on Substratum not being a security is “it’s a utility token”, however utility tokens can be securities as well. There are lots of grey areas when looking into laws behind the classification of crypto assets as securities. However, based on recent cases involving U.S. based ICO’s, it’s fairly obvious SUB is a security.

Under the Howey Test, a transaction is an investment contract if:

  • It is an investment of money
  • There is an expectation of profits from the investment
  • The investment of money is in a common enterprise
  • Any profit comes from the efforts of a promoter or third party

So, on the first point Substratum passes being “an investment of money” since they took in funds from non accredited investors during an ICO, so money was invested by the public.

On the second point, there is an expectation of profit, so it passes that one as well. Substratum’s website literally says in bold letters: “Earn cryptocurrency, Change the world”. There is also an expectation of profit from earning potential through PoS (Proof of Stake) of tokens.

On the third point, there is a common enterprise and that’s Substratum.

“In the context of an investment contract, a “common enterprise” is defined as an enterprise in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those offering or selling the investment or of third parties.”

The token is useless without Substratum. SUB’s value is dependent on usage of the network, whose future is controlled by Substratum. Considering they’re not open sourcing 100%, it’s pretty clear SUB passes this point as well.

Substratum passes the fourth point as well. “Any profit comes from the efforts of a promoter or a third party”. The promoter is Substratum. They asked for funding from the public to make their ideas and goals come to fruition.

In other words, they are providing a product/products and their success is dependent on themselves. They also offered tokens, with the ability to purchase without AML/KYC enforcement with U.S. investor participation.

Did Substratum Commit Securities Fraud?

During Substratum’s pre-ICO, the team advertised on their website at the time having current/past clients with Apple, Disney, Facebook, HP, the NBA and more.

These current/past clients have since been removed off Substratum’s website following a successful ICO. It should be noted, these were never current/past clients of Substratum, but rather those of the CEO’s past company he founded, OverridePro.

Why did they lie and say they were current/past clients of Substratum?

It’s simple, to get ICO hype.

I think this was very misleading marketing and likely fraud as advertising clients like Apple, HP, Facebook and the NBA create a cushion for investor trust. When in reality, they are not and will not be working with Substratum in any cooperative means whatsoever.

Substratum’s unaccounted ICO Funds

Substratum raised a total of $13.8 million from the public with a “$5 million direct USD investment from Render Payment”.

Substratum ICO raise totals

17,778.25 ETH Raised

154.6736 BTC Raised

232,105.45 XRP Raised

602.1433 BCH Raised

865.9953 LTC Raised

Looking at these total raises by the time the ICO concluded on September 14th all were worth on the closing week approximately ~ ETH $4,294,336.29 BTC $547,055.77 XRP $40,663.7143 BCH $249,702.805 LTC $40,684.4592

Total ~ $5,172,443.04

Now, the Substratum team claims they received a $5 million direct USD investment from Render Payments at the time of their ICO so we will include that and give them the benefit of the doubt. So that brings the total raise to approximately $10,172,443.04 which is still $3,627,557.04 short of their total raise they told the public.

Hmm that’s rather odd isn’t it?

I don’t find that too suspicious, however, what’s more concerning are unaccounted for tokens/coins that were not publicly disclosed by the team they raised them.

Upon further digging, I was able to find an archive link that included all of the addresses for their ICO raise. This has never been made public to the community and a big shout-out goes to krieptaugh for helping me find this.

Substratum ICO ETH, BTC, XRP, LTC, BCH wallet addresses that were given to ICO participants:

ETH Address: 0xAF518d65F84E4695A4DA0450eC02C1248F56B668

BTC Address: 1BpouN3sJJZtRpWJM56ZdStp1USvvpmbD4

XRP Address: rPM1aiRCTqUTj8ibZMqBuvvuPm1mWqBHaA

LTC Address: LVtZehjm5mCd5SWKzSBYZ1tGUNVPq719ZQ

BCH Address: 1KhDawtid3v9kdLLVybPQTWTs5FxfXDrMs

There are some interesting things I was able to find out when examining all the wallets. The one that struck me the most immediately was the Bitcoin Cash wallet.

As you can see there has been 1304.261 BCH received. The number reported by the team was 602.143 BCH raised. This is more than double that was reported and a 702.118 BCH difference. In other words, the team did not account for $291,161.313 by saying they only received 602.143 BCH. That’s a little more than a small error.

Why did Substratum not disclose this?

CEO Gives Price Predictions & Pumps his Own Token Across Twitter

Substratum CEO, Justin C. Tabb has provided to the public several occasions of manipulation as defined by the SEC.

During late December of 2017, Justin gave a personal price prediction to thousands of telegram users creating a narrative that many still cling on to this day.

Here’s the text that was given to Substratum Network Community telegram members in late December followed by a screenshot:

“For explosive growth. For REAL projects. Ethereum 1 year ago was $7. Now it’s $700~. I do. 100x. $30. That’s my personal projection”.

Now, to any intelligent observer, why is a CEO of a once nearly billion-dollar cryptocurrency project throwing out 100x projections? Why does the community still cling to this $30 figure? Easy, because someone (Justin Tabb) said it!

In this tweet, Justin Tabb shows his SUB balance and approximately 183k SUB sitting in a sell order worth about 16.2957 BTC at the time~ roughly ~$279,226

“WHOA, talk about a BUY WALL. Massive buys on $SUB out there!

Join the #Substratum revolution!

#cryptocurrency #bitcoin $btc #altcoin”

Where did all this SUB come from? Why does he have an uneven number of SUB? Was he selling it?

But that’s not it! Justin Tabb has tweeted on more than 40 occasions showing him pumping his own token across Twitter to thousands of followers. Here’s a few linked off a Reddit post that went trending on r/cryptocurrency.

Lastly, Substratum’s CEO has even admitted to being a pump and dumper in front of a live audience on VIDEO.

No words…

These points are important to keep in mind especially given some of the recent busts and crackdowns on shady ICO’s. In the SEC’s 2018 annual report from the Division of Enforcement there are a few large busts that were made.

Titanium Blockchain lied about existing business relationships with everyone from Apple to PayPal, and TokenLot was busted due to acting as an unregistered broker/dealer.

Contrary to popular Substratumland belief, I don’t see any of these things stemming from being “out of context” or “excitement”, it’s clear manipulation from Substratum’s CEO.

In Conclusion

  • Substratum passes all 4 points of the Howey Test and therefore can be deemed as a security subject to U.S. securities laws
  • I don’t believe Substratum’s explanation for U.S. participation in their ICO was enough to allow them to bypass SEC rulings on securities.
  • Substratum has potentially at the height of the bull market in January, millions of unaccounted for funds.
  • Substratum more than likely committed securities fraud by advertising false current/past clients of Substratum, having their CEO give price predictions, tweet more than 40 instances of pumping his own token, and even openly admitting to being a pump and dumper.
  • There have been crackdowns by the SEC on shady ICO’s including Titanium Blockchain, who raised over $12 million before it was discovered their CEO lied about business relationships with everyone from Apple to PayPal was investigated by the SEC. Also included in their biggest busts was TokenLot, which stands accused of operating as an unregistered broker/dealer.
  • Long story short, I would not be surprised to see Substratum on the SEC’s radar.

Disclaimer: I am not a financial advisor. My articles and research should not indicate nor be a means for one to buy/sell crypto assets. I’m merely sharing my thoughts and opinions on the research I’ve collected. Please as always fact check and do your own due diligence.

UPDATED (January 8th, 2019)

Reddit user 707bwolf707, a Substratum moderator made a response to these allegations.

From what I can see the ico ended with 602 BCH. All other BCH were transferred to that wallet after the ico

Whitepaper p. 17/18: ICO End Date: September 14 2017 00:00 ES 602.1433 BCH raised (besides ETH, BTC, XRP, LTC)

BCH explorer: September 14 2017 is on page 8. All other BCH transcations happened afterwards.

Here’s the facts and my response to 707bwolf707:

The link above shows there is only one outgoing transaction from Substratum’s ICO BCH wallet for 1303.01249075 BCH. This tx is from October and we know the wallet was designated as a contribution wallet for ICO participants.

In total 1304.261 BCH has been received from this address. However, Substratum only accounted for 602.118 BCH raised.

Substratum’s ICO statistics were released months later in December 2017 within their updated V2 whitepaper with no mention of this discrepancy in the BCH blockchain and Substratum’s accounting. This update was made AFTER all the BCH was sent to a large address in one tx again linked here, likely an exchange.

If these funds “weren’t accepted” as ICO contributions then why didn’t Substratum refund them?

The fact all the funds were sent to the same address and subsequently all sold at once before ICO statistics were released claiming they only received 602.118 BCH, indicates this extra 702.118 BCH was not meant nor intended to be treated as legitimate ICO contributions.

Which, if we’re being objective shows possible nefarious intent.

In Analysis