SEC Freezes $27 Million Related to a Blockchain/Cryptocurrency Acquisition
On April 6, 2018, the Securities and Exchange Commission (SEC) obtained a court order freezing more than $27 million in proceeds from alleged illegal distributions and sales of restricted shares of a public company, and charged the company, its CEO, and three other affiliated individuals. That same day, the Nasdaq Stock Market said it halted trading in the company’s stock. The SEC’s complaint alleges that shortly after the company began trading on the Nasdaq Stock Market and announced the acquisition of a purported blockchain-empowered cryptocurrency business that its stock price rose dramatically until its market capitalization exceeded $3 billion. The SEC further alleges that the CEO and the three other individual defendants then illegally sold large blocks of their restricted shares to the public while the stock price was excessively elevated and that they collectively reaped more than $27 million in profits.
By way of background, and as alleged by the SEC, the company went public under a scaled-down version of a traditional initial public offering known as Reg A+ late last year. In December 2017, the company’s Class A shares began trading on the Nasdaq Stock Market. Two days later, the company announced that it had acquired the purported blockchain-empowered cryptocurrency business from another entity. The SEC alleges that one of the individual defendants held at least a 92% stake in this entity. The SEC further alleges that — notwithstanding that this acquired business had no ascertainable value — the company’s stock price rose excessively and quickly after said acquisition. Specifically, by December 18, 2017, the company’s stock price rose to a high of $142.82 per share; an increase of nearly 550% from the prior day’s closing price and about 2,670% above the company’s closing price on its first day of trading just several days earlier.
This action serves as yet another example of the SEC’s heightened and aggressive focus in this area. As we discussed previously on this blog, one of the focus areas for the SEC’s Cyber Unit that was created just last September is “Violations involving distributed ledger technology and initial coin offerings.” More recently, the financial press reported that the SEC had launched a “sweep” in this area by serving subpoenas and information requests on technology companies and investment management firms and brokers doing business in the virtual currency markets.
Returning to the SEC’s $27 million freeze action here, the SEC alleged only registration offering violations against the defendants. This may not be the last of the charges, however, as the SEC described this as a “continuing investigation” in its press release.