Submitted by: Joshua Kelly, Compliance Consultant, Red Oak Compliance Solutions
In recent months, the Texas State Securities Board (TSSB) has taken a hardline stance against the blockchain-based online transaction systems known as cryptocurrencies. During the past year, popular cryptocurrencies such Bitcoin, Ripple, and Ethereum experienced tremendous growth (as much as 231% in a little over a month), leading to a massive surge of investors seeking to take advantage of the crypto-craze sweeping the globe. However, in the midst of all this activity, the TSSB conducted a sweep of its own and uncovered some of the disturbing realities behind this highly-volatile new market.
Starting in December 18, 2017, the attorneys and investigators in the Enforcement Division opened 32 investigations into promoters of cryptocurrency investment who appeared to be illegally and fraudulently using online advertisements, social media, and other public solicitations to attract Texas investors. Among the 32 promoters:
- None of them were registered to sell securities in Texas
- 30 were broadly using websites, social media, and online advertising to market to Texans
- Seven promoters were offering securities tied to a new cryptocurrency
- Five ignored the massive risks imposed by crypto by guaranteeing returns as high as 40% per month
- Only 11 actually provided investors with a physical address
- Six were actively recruiting sales agents without verifying they were registered with the Securities Commissioner
- Six of the offerings involved payment of a commission to who recruited new investors in the scheme
While many promoters of cryptocurrencies advocate investment in Bitcoin, Ethereum, and other legitimate and well-known cryptocurrencies that are seen as safe, or at least as safe a cryptocurrency can be, there are currently over 1,600 cryptocurrencies in the market. Many have white papers that offer very little in the way of innovation and have names as confidence-inspiring as Potcoin, Dogecoin, and the aptly-named Ponzicoin.
BitConnect, one of the promoters who was subject to the recent investigation, told purchasers of their coins that they could lend their coins to the company, who would then pool their funds to generate a profit that would supposedly “entitle investors to interest payable up to 40% per month”. BitConnect “failed to comply with regulations requiring it to undergo a background check to determine whether their program was fair, just, and equitable”. In addition, if “failed to comply with laws that required the review and registration of its sales force”. In the end, BitConnect was a scheme designed to take manipulate the emotions of Texans swept up in cryptocurrency hype and defraud them of their hard-earned money.
While the TSSB emphasizes that it is not regulating the cryptocurrencies themselves, “only the investments that claim to use the virtual currencies in an investment program”, their message is clear: do not become a crypto-marketer. Many of those investigated seemed to be “nothing more than a multi-level marketing scheme” with the guise of forward-thinking tech company.
As recently as July 11th, the State of Texas continues to aggressively target the fraudulent promoters of cryptocurrency-related investments; adding a network of three companies, Mintage Mining LLC, Symatri LLC, and NUI Social, to the growing list of cryptocurrency promoters who have failed to comply with the Texas Securities Act. Emergency cease and desist orders have been placed on these companies, preventing them from selling any securities or acting as securities dealers in any capacity. The TSSB’s investigation has revealed an environment “ripe with illegal and fraudulent securities offerings”, and one that any investment adviser should be very wary of entering into.
Read the full TSSB Cryptocurrency Enforcement Actions report here.
Read the TSSB Cease and Desist order here.