$874 673 000 USD
DESCRIPTION OF EVENTS
"THE FIRST EVER 100% DECENTRALIZED" "international crowdfunding - the new generation platform."
"Revolutionary Smart Contract* technology provides decentralized market participants with the ability to directly engage in personal and business transactions. The Forsage Decentralized Matrix Project's Smart Contract is publicly and perpetually available to view on the Ethereum Blockchain." "Forsage has no owners or management. It has been deployed as a smart contract and from that moment runs independently. No one can tamper with it, even the founders and developers, since smart contracts are irreversible by nature."
"On February 6, 2020, Forsage developers deployed a self-executing smart contract on the Ethereum Blockchain that exists in perpetuity and cannot be modified by any entity." "The Forsage smart contract is nothing more than a payment gateway that facilitates peer-to-peer commission payments between its program participants." "Verifiable proof of the project’s performance statistics as well as its partners transaction history are publicly available on the Ethereum blockchain."
"Indefinite access to the Forsage project is an intrinsic feature programmed into the smart contract to enable continued participation in the matrix project." "A crowdfunded decentralized matrix project specifically designed to stimulate a global relocation to the crypto ecosystem by offering newcomers a seamless introductory experience." "Network nodes irrevocably record and ubiquitously store the transactional history of all Forsage network partners on the Ethereum Blockchain."
"Forsage was launched in January 2020 by four founding members: Vladimir Okhotnikov of the Republic of Georgia, Jane Doe aka Lola Ferrari of Indonesia and Mikhail Sergeev and Sergey Maslakov of Russia. It quickly grew to be one of the most popular decentralized apps (dapps) on the Ethereum blockchain, and at its peak, it consumed roughly a quarter of the blockchain’s bandwidth and caused gas fees to spike, data from Dune Analytics showed."
"What is the difference from the pyramid? Because I don't give participants unrealistic promises. The success of each depends on him. Forsage [will still be] stable even when a [it grows to a] thousand times the [present] scale. The fast and the furious [do] not create debts and other obligations. Forsage is a crowdfunding platform for the new generation and has no relation to the pyramids. The principle of a financial pyramid [is] based on the fact that most of the money [is] concentrated in the hands of its creators. The sooner you come, the more money. A pyramid scheme can be closed at any time. The participants of the platform Forsage - both leaders and newcomers - are equal. To stop the platform, no one can, because its functioning is ensured by a smart contract and cannot be deleted or changed. Even if the site will stop working, all the data and structure will be in integrity and [the] smart contract will continue to operate as long as there is Internet and electricity."
"All participants are 100% free of commissions and additional fees from the platform. This was realized due to the strict criteria introduced when the platform was created back in 2020. Every Forsage participant is considered equal, and there is no segregation into admins, founders, and others. On top of that, the execution of cryptomarketing in blockchain does not depend on banks, payment services, and other third parties." "Forsage’s founders, whom the SEC says have “prior experience in MLM [multi-level marketing] projects,” coded smart contracts that would route investor funds to other investors’ wallet addresses. But the founders also included code that paid out a portion of investor funds to wallets not associated with any Forsage investor, despite marketing materials that claimed “100% of the income goes directly and transparently to the members of the project with zero risk.”"
"How to effectively engage people? What if I don't know how to invite? You do not have to impose a participation to someone. Now a lot of people are interested in earning online and some are looking for new opportunities. They can be found in the social networks of their own, or set up an automatic sales funnel and interested people will find you. Read more about this in the section 'Academy'. Use your strengths, watch webinars, and ask questions of experienced participants of the platform and improve your skills through free training in school and success will not keep you waiting. Your result depends only on you!"
The Forsage executives posted videos that promised huge returns for investors, with one calling it "a powerful long-term source of passive income" and telling viewers, "Forsage means fast and furious." "Millions of users from around the world were recruited by a network of promoters, including a group that called themselves the “Crypto Crusaders,” to send money via smart contracts on the Ethereum, Tron and Binance blockchains in exchange for a payout when they recruited another investor, the SEC said – a business model the agency described as “a textbook pyramid and Ponzi scheme.”" "However, Forsage allegedly has operated as a pyramid scheme for more than two years, in which investors earned profits by recruiting others into the scheme. Forsage also allegedly used assets from new investors to pay earlier investors in a typical Ponzi structure."
"A[s of July 5th, 2020], Forsage [was] the most popular Ethereum-based Dapp in existence, with 4,341 users over the past 24 hours, according to DappStats. Data show[ed] that $2.86 million passed through the Dapp in the past day alone, equating to over 12,000 ETH." "The dapp is classified by popular ranking site DappStats as a “High-Risk” application, where users profit by attracting more users to invest in multi-level “slots”. Each slot is twice as expensive as the previous, and returns twice as much profit back to the original referrer." "As seen on Dune Analytics, the Forsage smart contract [was reported to be] responsible for consuming 12.78% of Ethereum’s gas over the past twenty-four hours."
"The Securities and Exchange Commission of the Philippines issued a cease-and-desist action against Forsage in September 2020." "An announcement from its SEC on June 30[, 2020] advised users of the dapp in question, Forsage, to stop using it immediately, and demanded that the owner officially register with the commission." According to the SEC: “Forsage’s so-called smart contract partakes of the nature of securities through an investment contract where investors need not exert any effort other than to invest or place money in its scheme in order to profit.”
"The SEC states they have already been contacted by Forsage, and what they heard did not prove helpful to the commission’s efforts." The SEC notice stated: “Forsage claims that its program will continue to function even if its website “www.forsage.io” is closed for any reason. It even implied that the Government cannot shut it down because it is decentralized and thus free from any authority.”
"FORSAGE is NOT REGISTERED with the Commission and OPERATES WITHOUT THE NECESSARY LICENSE AND/OR AUTHORITY to solicit, accept or take investments/placements from the public nor to issue investment contracts and other forms of securities defined under Section 3 of the Securities Regulation Code (SRC). FORSAGE is also NOT REGISTERED either as a crowdfunding intermediary or a funding portal under SEC Memorandum Circular No. 14, Series of 2019 or the Rules and Regulations Governing Crowdfunding."
"Accordingly, the Commission warns all unscrupulous individuals and/or entities that strict penalties are imposed for violations of the Securities Regulation Code, the Revised Corporation Code, and such other rules and regulation enforced by the Commission." "Those who act as salesmen, brokers, dealers or agents of such unauthorized entities like the operators of the FB Page FORSAGE PHILIPPINES and FORSAGE SMART CONTRACTS in selling or convincing people to invest in their investment scheme offered including solicitations and recruitment through the internet may likewise be criminally prosecuted and penalized with a maximum fine of Five Million pesos (P5,000,000.00) or a penalty of Twenty-one (21) years of imprisonment or both pursuant to Sections 28 and 73 of the SRC."
"Six months later, the Montana Commissioner of Securities and Insurance followed suit, but Forsage’s promoters continued to promote the alleged scheme anyway." "Despite cease-and-desist actions against Forsage for operating as a fraud in September 2020 by the Securities and Exchange Commission of the Philippines and in March 2021 by the Montana Commissioner of Securities and Insurance, the defendants allegedly continued to promote the scheme while denying the claims in several YouTube videos and by other means." "Members of the Crypto Crusaders made infographics purporting to explain “Why Forsage is Absolutely Not a Pyramid Scheme !!” and posted them to various social media platforms."
"As the complaint alleges, Forsage is a fraudulent pyramid scheme launched on a massive scale and aggressively marketed to investors," said Carolyn Welshhans, Acting Chief of the SEC’s Crypto Assets and Cyber Unit. "Fraudsters cannot circumvent the federal securities laws by focusing their schemes on smart contracts and blockchains."
"Forsage is a textbook pyramid and Ponzi scheme," the [United States] SEC's complaint reads. "It did not sell or purport to sell any actual, consumable product to bona fide retail customers during the relevant time period and had no apparent source of revenue other than funds received from investors."
"Each of the “Crypto Crusaders” – Sarah Thiessen, Carlos Martinez, Ronald Deering, Cheri Beth Bowen and Alisha Shepperd – has been charged with fraud and the offering and sale of unregistered securities, along with two other promoters, Samuel Ellis and Mark Hamlin, who made YouTube videos advertising Forsage." "The SEC claims that Forsage had raised as much as $2.9 billion from the sale of slots as of May 2021. From this haul, the founders jointly received millions while the influencers were collecting six-figure sums."
"The accused dismissed all these regulatory brushback pitches as false, doubling down on their insistence that Forsage was a legit operation. The SEC notes that Forsage influencers didn’t tolerate “negative statements about Forsage” and threatened to banish investors who complained or failed to bring in a sufficient number of new recruits."
"The Securities and Exchange Commission today charged 11 individuals for their roles in creating and promoting Forsage, a fraudulent crypto pyramid and Ponzi scheme that raised more than $300 million from millions of retail investors worldwide, including in the United States. Those charged include the four founders of Forsage, who were last known to be living in Russia, the Republic of Georgia, and Indonesia, as well as three U.S.-based promoters engaged by the founders to endorse Forsage on its website and social media platforms, and several members of the so-called Crypto Crusaders—the largest promotional group for the scheme that operated in the United States from at least five different states."
"In addition to charging the four founders, the complaint, filed in United States District Court in the Northern District of Illinois, also charges Cheri Beth Bowen, of Pelahatchie, Miss., Ronald R. Deering, of Coeur d’ Alene, Idaho, Samuel D. Ellis, of Louisville, Ky., Mark F. Hamlin, of Henrico, Va., Carlos L. Martinez, of Chicago, Ill., Alisha R. Shepperd, of Dunedin, Fla., and Sarah L. Theissen, of Hartford, Wis., with violating the registration and anti-fraud provisions of the federal securities laws. The SEC’s complaint seeks injunctive relief, disgorgement, and civil penalties."
"The SEC says the founders had a falling out in March of , with Okhotnikov being cut off from access to the Forsage website and Telegram channels but retaining control of its YouTube channel, which has over 41,500 subscribers. Okhotnikov used this YouTube channel to criticize a new MLM scheme concocted by Ferarri and Sergeev known as Express Smart Game, while Okhotnikov launched a similarly scammy project called Meta Force."
"Decrypt spoke to Ethereum researcher and developer Philippe Castonguay, who examined the Forsage code and concluded that the smart contract “can’t be halted”. Even if the SEC dismantled the website, says Castonguay, the lack of a simple user interface would only slow the Dapp’s usage at best. When asked if the SEC had any power whatsoever to close down Forsage, Castonguay seemed doubtful—such is the nature of Ethereum’s permissionless blockchain technology."
“Unless there is a currently unknown vulnerability, I don't think [they could], no, said Castonguay. “They could try to track down who the users are by asking information to exchanges they use and then reaching out to users directly,” he said, adding, “but that may well prove to be costly and inefficient.”
"Ellis and Thiessen have already reached settlements with the SEC that include disgorgement and civil penalties. The SEC’s complaint seeks injunctive relief, disgorgement and civil penalties for the remaining promoters and the four founders."
"Without admitting or denying the allegations, two of the defendants, Ellis and Theissen, agreed to settle the charges and to be permanently enjoined from future violations of the charged provisions and certain other activity. Additionally, Ellis agreed to pay disgorgement and civil penalties, and Theissen will be required to pay disgorgement and civil penalties as determined by the court. Both settlements are subject to court approval."
Forsage is a multi-level marketing scheme which operates through a transparent blockchain smart contract on Ethereum, Tron, and Binance Smart Chain. Based on the way this scheme operates, participants will lose their money unless they succeed in inviting others to participate, which is often challenging and is also illegal according to securities laws in most jurisdictions. By definition, the majority of users will lose money, and the operation is a net loss due to the gas fees of the Ethereum blockchain, although a minority will make a net profit off the investments of others they recruit. Unlike other multi-level marketing schemes, Forsage reports that they don't pass rewards upward to any of the scheme creators, and the website does not make any claim to pretend there is a source of profits. It is very challenging to assess the true loss due to the fact that many participants in the scheme may have both invested and profited from the investments of others, which would offset one another.
At it's peak, Forsage was one of the largest decentralized applications on the Ethereum blockchain. The decentralized nature of the blockchain means that shutting down this operation is not feasible, although some actions could be taken to shut down centralized portions such as the website or particular promoters. The website presently blocks connections from the United States, Canada, Australia, Japan, and many parts of Europe. The United States SEC charged 11 individuals in connection with promoting the scheme, and two have so far agreed to voluntarily pay fees to avoid further consequences. It is unknown whether those fees will in any way be used to compensate victims. At present, the activity on the blockchain appears to have largely died down, suggesting that the scheme is no longer operating.
HOW COULD THIS HAVE BEEN PREVENTED?
Due to the nature of decentralized technology, there is no way to fully prevent schemes like this from operating. There is likely to continue to be decentralized multi-level marketing and ponzi schemes which happen regardless of any action that regulators take.
One of the most important actions that can be taken is surrounding education of the public on how to recognize multi-level marketing and ponzi schemes. By creating simple educational videos and a quiz for new investors to the blockchain space, understanding can be ensured prior to entering, which should cut down on the number of participants who fail to understand what they are buying into.
In this particular case, there appear to have been false claims made by the proponents of the scheme. One of which was surrounding the lack of profits being sent to founders, with Forsage claiming that all participants are equal in the scheme while the SEC reports that the smart contracts themselves are encoding revenue to the founders. Better education and insight into these would have benefited investors to make more informed decisions.
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