New Machine Learning Tool Firm Deceives Investment Fund Committee

When offering frauds are mentioned most think that is the small and perhaps over-anxious investor who tosses his or her capital at a “too good to be true deal that gets taken.” There is no doubt that is true in some instances. In others it is not. Indeed, in some cases sophisticated investors who may be professionals are taken in by fraudsters. The Commission’s most recent case in this area is a good example. SEC v. YouPlus, Inc., Civil Action No. 5:20 -cv-04855 (N.D. Ca. Filed July 20, 2020).

Defendant YouPlus is based in California. Its founder and CEO, Shaukat Shamin, is also a defendant. The firm purports to have developed a machine-learning tool to interpret and deliver customer insights from videos on the internet for marketers and others.

Over a period of six years Defendants raised about $17.5 million from approximately 50 investors. Most of the funds were, however, actually raised in 2018 and 2019 when Defendants secured about $11 million from 30 investors, including an investment fund. Those funds were raised using a series of misrepresentations and false documents.

First, Defendants made a series of misrepresentations in the 2018- 2019 time period to investors. For example, in June 2018 Mr. Shamin told some investors that the firm expected 2018 revenues to exceed $8 million and $40 the next year. In connection with this claim, investors were furnished with a spreadsheet that depicted actual revenue through June 2018 of over $1.5 million. There is no basis for the projection, according to the complaint.

In September 2018 other investors were told that the firm’s revenues for the first half of the year exceeded $1.1 million; projected revenue for the year would be about $7.8 million. Again, there was no basis for the projection, according to the complaint. Nevertheless, the Investment Committee of a venture fund that received the baseless information invested almost $2 million in 2018 and 2019. Later, financial models that were baseless induced other investors to also put capital into the firm.

Second, Defendants misrepresented the size of the firm’s customer base. For example, in an Investor and Shareholder Update, circulated in June 2019, there was a chart depicting the top ten investors in the company. Each had paid at least “hundreds of thousands of dollars,” according to the complaint. The chart was false.

Mr. Shamin also provided a spreadsheet to at least two potential investors showing what was called a “customer pipeline” with nearly $1 million in monthly realized revenue. Over 150 purported firm investors, including a number of well-known Fortune 500 companies, were listed. In fact, most of the list was fictitious.

Subsequently, certain investors were told that the company was pursuing a Series A fundraising round. The fund raising was supposedly going well. In fact, it was not. At the time YouPlus was running out of capital. This became apparent when counsel for the venture fund met with Mr. Shamin. During the meeting Defendant Shamin admitted to making misrepresentations regarding the historical financial condition of the company. The complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). The case is pending. See Lit. Rel. No. 2485 (July 20, 2020).

Video Program: The Many Faces of Securities Fraud – And How to Avoid the Subpoena, August 6, 2020, 12:00 p.m. ET. Chain, Tom Gorman. Free registration, materials, CLE (here).