Source: https://dfr.vermont.gov/reg-bul-ord/cease-and-desist-levelnet-inc-and-paul-shkliaev
Timestamp: 2019-08-22 12:07:22
Document Index: 549983397

Matched Legal Cases: ['§ 5604', '§ 5102', '§ 5102', '§ 5301', '§ 5401', '§ 5301', '§ 5401', '§ 3', '§ 5402', '§ 5402', '§ 5604', '§ 5604', '§ 5604', '§ 5604']

Cease and Desist Levelnet Inc. and Paul Shkliaev | Department of Financial Regulation
Cease and Desist Levelnet Inc. and Paul Shkliaev
Docket No. 18-030-S
Printer friendly version of Docket No. 18-030-S 890.71 KB
The Commissioner of the Vermont Department of Financial Regulation (“Commissioner”), based on the Ex Parte Motion for Cease and Desist Order filed by the Securities Division and the attachment thereto, finds that grounds exist to order that the above-named Respondents immediately cease and desist from violating the Vermont Uniform Securities Act, 9 V.S.A. Chapter 150 (“the VUSA”), and hereby issues the following Findings of Fact, Conclusions of Law, Order and Notice of Right to Hearing.
LevelNet is currently engaged in a token offering, also known as an initial coin offering (“ICO”). LevelNet is marketing and selling tokens through its website and targeted internet advertising for the purported purpose of raising funds to develop and launch the LevelNet Network, a decentralized antivirus platform. LevelNet’s website describes two phases of the ICO and names two issuers of tokens, Level Capital LLC (issuer of “LVL tokens”) and LevelNet Foundation (issuer of “LVLS tokens”). In the first phase, described as a “noninvestment,” Level Capital will issue LVL tokens that will allow token owners to use LevelNet services and to sell tokens on cryptocurrency exchanges. The second phase is described as an “investment” and involves the sale of LVLS tokens. The website states that purchasers of LVLS tokens will have shares in the LevelNet project and will share in the profits generated by a newly-created fund. In this phase, LVL tokens may be exchanged for LVLS tokens. While LevelNet claims that the offering is compliant with securities laws, in actuality, LevelNet is offering unregistered securities in violation of the Vermont Uniform Securities Act.
LevelNet is a corporation organized in California with a registered business address of 34 Peach Blossom, Irvine, California 92618. LevelNet’s website states that its United States office is located at 100 Spectrum Center Drive, Suite 900, Irvine, California 92618. The corporation is described as a software development business.
LevelNet is not registered to do business in Vermont with the Vermont Secretary of State’s Office and is not registered in any capacity with the Vermont Securities Division.
Paul Shkliaev is the Chief Executive Office and founder of LevelNet. His last known address is 34 Peach Blossom, Irvine, CA 92618.
The LevelNet Offering
LevelNet is currently conducting an Initial Coin Offering (“ICO”) and is in the “pre-sale” stage of the offering. Affidavit of Emily Kisicki at ¶ 3.
Shkliaev is the face of the offering. He appears in interviews and video broadcasts to promote the offering. LevelNet has a YouTube channel with information videos describing LevelNet, its projects, and the ICO. These videos typically feature Shkliaev. Affidavit of Emily Kisicki at ¶ 17.
6. LevelNet describes two phases of the ICO and names two issuers of tokens, Level Capital LLC (issuer of “LVL tokens”) and LevelNet Foundation (issuer of “LVLS tokens”). These two entities do not appear to be formally organized or registered under state law.
7. The ICO’s stated purpose is “fundraising for the development and launch of LevelNet Network.” Affidavit of Emily Kisicki at ¶ 7.
8. LevelNet purports to be developing a decentralized antivirus platform to be shared by members of the LevelNet network. LevelNet’s advertising anticipates that it will have rapid success that will result in returns for project investors. LevelNet projects on its website that it “will reach one hundred million users by 2021, with over $220 million in sales and over $80 million of free cash flows for distribution to shareholders.” Affidavit of Emily Kisicki at ¶ 6.
9. On May 16, 2018, the “ICO details” page stated that $777,132 was raised through 346 backers. On May 24th, 2018, the “ICO details” page stated that $749,981 was raised through 359 backers. A “token sale bonus” structure is detailed on the website as: 10% for 0-$1.5 million raised, 7% for 1.5-5m raised, 5% for 5-7 million raised, and 3% for 7-12 million raised. The “soft cap” is $1.5 million, and the “hard cap” is $12 million. Details are also given regarding the “Roadmap”: the LVL token sale began in Quarter 1 of 2018, “exchange of LVL stock tokens for LVLS tokens” will take place in Quarter 4 of 2018, and sales of LVLS tokens will take place in Quarter 1 of 2019. Affidavit of Emily Kisicki at ¶ 13.
The LevelNet Offering: Investment in a Common Enterprise
10. Phase One of the Offering. During the time that the ICO is being conducted, LevelNet is still in its development phase and is not currently operational. LevelNet, through Level Capital, will issue “LVL tokens”, that will be invested in “operations and infrastructure development for the final completion of LevelNet End-Point Security and its commercial launch”. LVL tokens will be sold on cryproshare exchanges. Affidavit of Emily Kisicki at ¶¶ 7 and 8.
11. Phase Two of the Offering. LevelNet, through LevelNet Foundation, will create an investment fund and issue “LVLS tokens” to investors in the fund. These tokens represent shares in the LevelNet Network project and the investor will share in the funds profits. In this phase, LVL tokens may also be exchanged for LVLS tokens. Affidavit of Emily Kisicki at ¶ 9.
12. In both phases of the offering, purchasers of tokens are providing capital to LevelNet for investment in the LevelNet Network.
LevelNet Offering: Expectation of Profit
13. LevelNet makes representations to potential investors regarding the expectation of profit resulting from the investment in both phases of the ICO, to be gained through no effort of the investor. LevelNet represents that an investor may make money in a number of ways, including (1) through the increase in the value of it tokens; (2) as a result of the ability to exchange LVL tokens for LVLS tokens; and (3) by owning shares of LevelNet and participating in the profits of the LevelNet Network. Affidavit of Emily Kisicki at ¶ 15.
LevelNet attempts to distinguish the profitability of its offering from the myriad of other offerings by internet companies. LevelNet states that “unlike many internet companies” LevelNet projects will generate significant profits and investors will share in those profits in a relatively short time. LevelNet places a valuation of the company at between $583,000,000 and $1,268,000,000. LevelNet projects that at a $1,000,000,000 valuation, investors in phase two may earn a return of 2062% over 4-5 years. Affidavit of Emily Kisicki at ¶ 16.
LevelNet Offering: Availability
LevelNet tokens are available for purchase by investors located in the United States, including in Vermont. LevelNet has made various statements regarding limits on U.S.-based buyers, including stating in its “ICO FAQs” that US citizens purchasing tokens for speculative purposes must invest through Startengine.com, a crowdfunding platform. No such Startengine offering currently exists. The “ICO FAQs” also purport to limit investment in LVLS tokens in the United States to “qualified investors.” Affidavit of Emily Kisicki ¶ 10.
Despite claims regarding limits placed on US participants, once an investor expresses interest in the offering, LevelNet communication suggests that no such limits exist. One communication from LevelNet expressly stated that LevelNet may now accept investments from US residents, including the purchase of shares in LevelNet. Affidavit of Emily Kisicki at ¶ 11.
After Ms. Kisicki’s initial contact with LevelNet, a subsequent visit to LevelNet’s webpage revealed two pop ups: 1) advising that she could get a promo code for 1000 tokens sent to her via Facebook Messenger, and 2) advising that she could join LevelNet now and get “10% bonus for tokens before $1.5m”. The homepage stated that the public pre-sale is live and ends in 15 days, 14 hours. Affidavit of Emily Kisicki at ¶ 12.
After viewing the LevelNet webpage, Ms. Kisicki was the target of internet advertising by LevelNet on other sites on multiple occasions. Affidavit of Emily Kisicki at ¶ 18.
LevelNet does not appear eligible for a registration exemption as it did not notice file through the US Securities Exchange Commission’s Edgar Database.
By promoting its offering with no restrictions on its website, through targeted advertising, and elsewhere on the internet, LevelNet and Shkliaev are advertising, promoting, and offering securities to United States residents, including Vermont residents.
Pursuant to § 5604(a)(1) of the VUSA, the Commissioner may issue a cease and desist order without a prior hearing if he determines that “a person has engaged, is engaging, or is about to engage in an act, practice, or course of business constituting a violation” of the VUSA.
Pursuant to § 5102(28)(D) of the VUSA, a security “includes an investment in a common enterprise with the expectation of profits to be derived primarily from the efforts of a person other than the investor.”
The LVL tokens offered by LevelNet are “securities” as defined in 9 V.S.A. § 5102(28)(D) of the VUSA.
24. LevelNet is offering securities in the form of LVL and LVLS tokens that are neither registered with the Division, nor “federal covered,” nor exempt from registration, in violation of 9 V.S.A. § 5301.
25. LevelNet is effecting or attempting to effect transactions in securities for the accounts of others or for its own account without registration in violation of 9 V.S.A. § 5401(a).
26. LevelNet has engaged in, is engaging in, or is about to engage in a violation of 9 V.S.A. § 5301, and LevelNet has engaged in, is engaging in, or is about to engage in a violation of 9 V.S.A. § 5401.
27. LevelNet has engaged in deceptive advertising in violation of V.S.R. § 3-1(e)(16) by making unfounded and unrealistic claims regarding expected project success and investor returns, and by falsely asserting that the ICO does not represent a securities offering and is in compliance with securities laws.
28. Shkliaev, by actively promoting the offering to Vermonters, is transacting business in the State without registration as an agent in violation of 9 V.S.A. § 5402(a).
29. Shkliaev has engaged in, is engaging in, or is about to engage in a violation of 9 V.S.A. § 5402(a).
30. 9 V.S.A. § 5604 authorizes the Commissioner to issue an order directing a person to cease and desist from engaging in an act, practice, or course of business that constitutes a violation of the VUSA.
31. 9 V.S.A. § 5604 further authorizes the Commissioner, in a final order, to order a civil penalty; costs of investigation; restitution; and/or disgorgement of any sums obtained in violation of the VUSA.
STATEMENT OF PENALTY OR COSTS
The Commissioner will seek a penalty of up to $15,000.00 for each violation and will seek actual costs of investigation.
Now, therefore, pursuant to 9 V.S.A. § 5604(a)(1), section 13 of Department Regulation 82-1(Revised), the reasons set forth in the foregoing Findings of Fact and Conclusions of Law, and the considerations set forth in 9 V.S.A. § 5604(e), the Commissioner hereby ORDERS that:
1. LevelNet shall CEASE AND DESIST from transacting any business as an unregistered broker dealer in Vermont.
2. LevelNet shall CEASE AND DESIST from offering or selling unregistered securities in Vermont.
3. Shkliaev shall CEASE AND DESIST from offering or selling unregistered securities in Vermont.
ENTERED at Montpelier, Vermont, this 25th day of May 2018.