A Florida man is in hot water for allegedly raising $108 million from more than 800,000 investors for what he claimed was an artificial intelligence development company – but which America's Securities and Exchange Commission (SEC) charges was a fraudulent, unregistered securities offering.

In the [1]complaint [PDF] the SEC claims Orlando man Ashraf Mufareh and his company, Onpassive LLC, put together a fraudulent "pyramid scheme." It says Mufareh had first claimed to be "developing a suite of computer applications using artificial intelligence" in 2018, saying that the apps "would seamlessly interface with one another in an 'ecosystem' similar to applications offered by established, well-known multinational technology companies."

The agency alleges Mufareh pitched potential investors on the opportunity to buy a position in a multi-level marketing pyramid structure – created by Mufareh himself – for $97. For that price, the complaint alleges, investors bought themselves a "locked in" position before "any launch of the purported product and before others began buying into the scheme in the future."

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It claimed investors who took him up on the "early bird" special – called "Founders" – were promised a "higher placement in the pyramid, and higher returns, than later investors waiting to buy into the scheme by making a product purchase and commencing payment of a monthly subscription after product launch." The idea was, the SEC alleges, that earlier birds would receive a portion of monthly subscription fees paid by those placed after them as a "commission."

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Essentially, the agency is claiming he was running a pyramid scheme with the Passive in Onpassive standing for the passive income the investors would supposedly be making.

The SEC said in a statement on Friday that the "passive income payments" were to commence on Onpassive's "commercial rollout of the computer applications" – but claimed that "as of June 2023, the defendants allegedly had not yet commercially launched any applications or commenced paying commissions."

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It also claimed Mufareh and Onpassive "knowingly made repeated material false and misleading statements and omissions" about the timing of product launch, which would trigger commission payments; the potential income to be earned; and the legality of their operations.

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The man and his company were accused of "furtively" creating websites mimicking the names of the existing sites where they would place positive reviews that were "falsely" passed off as objective, third-party opinions. The federal agency says Onpassive stopped accepting any more "Founder" registrations on June 22, 2022. But by then, or so it is alleged, the Florida resident had reaped "over $108 million from the purchase of over 1.12 million Founders positions by over 800,000 investors" (it's alleged that many bought more than one to maximize gains).

The complaint goes on to allege that "rather than commit investor proceeds" to develop and commercialize the "purported software applications," Mufareh had used funds to further the pyramid scheme and for personal use. The SEC claims Mufareh transferred investors' funds to his wife, Asmahan Mufareh, via various bank accounts and alleges "a considerable portion of investor funds" were transferred into "crypto assets" under the pair's "exclusive personal control."

It claims:

The Mufarehs then used funds from these accounts for personal expenses, including online retail purchases, upscale dining, TV subscriptions, groceries, salon and spa visits, and the purchase of stocks.

The SEC said it would be seeking injunctive relief (generally an order to stop doing that thing, for those unfamiliar with legalese), disgorgement of ill-gotten gains, plus civil penalties, and an order to prevent Mufareh from acting as an officer and director. The complaint also names his spouse, Asmahan Mufareh, as a relief defendant.

OnPassive and Ash and Asmahan Mufareh's lawyer, Christopher Garcia of Latham & Watkins, said his clients were "disappointed that the SEC filed this complaint, especially after they had been cooperating with the SEC's investigation. They deny the allegations in the complaint and look forward to being vindicated."

The SEC noted that its Office of Investor Education and Advocacy had issued an [11]Investor Alert to encourage investors to be aware of indications that a pyramid scheme may be posing as a multi-level marketing program. ®

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[1] https://www.sec.gov/files/litigation/complaints/2023/comp25809.pdf

[2] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_offbeat/legal&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=2&c=2ZNtMy9U0D4IbQ-6EyPdDEwAAA5c&t=ct%3Dns%26unitnum%3D2%26raptor%3Dcondor%26pos%3Dtop%26test%3D0

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[10] https://www.theregister.com/2023/07/18/tesla_excess_compensation/

[11] https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-ia_pyramidhtm.html

[12] https://whitepapers.theregister.com/