A Blockchain by Any Other Name? The SEC Says It’s Still on the Nose
The U.S. Securities and Exchange Commission won another victory against those hoping to cash in illegitimately on the hype surrounding cryptocurrencies and blockchain technology on July 2nd. In a New York court, the regulator accused Nevada residents T.J. Jesky, a lawyer, and his firm’s business affairs manager Mark DeStefano of selling shares in UBI Blockchain Internet, Ltd. from December 2017 to January of this year at inflated prices.
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What’s in a Name?
The phenomenon of companies adding the word “blockchain” to their name to witness surging stock prices may be coming to an end. The cynical addition of the hyped word by corporations with little or nothing to do with blockchain technology has entrapped many less-sophisticated investors over the past year or so. But the SEC is clamping down, with their latest case a testament to their efforts to rid the fledgling sector of as many bad actors it can find.
In the hearing, the SEC alleged that the defendants violated the registration provisions of federal securities laws by selling their allotment of 72,000 restricted shares in Hong Kong-based UBI Blockchain for up to $48 USD a share. They had been given permission to sell the shares for $3.70 according to the registration statement.
As the company’s stock prices soared, Jesky and DeStefano decided to take advantage of unwitting investors, raising $1.4 million before being slapped with an injunction in January this year. The SEC’s investigation was conducted with the help of its Microcap Fraud Task Force and the Financial Industry Regulatory Authority (FINRA).
We Make Hamburgers, We’re Called Blockchain — Everything OK?
With shares trading over-the-counter, UBI Blockchain Internet, Ltd. was founded in 2010 as JA Energy, a subsidiary of Almost Never Films. The company changed its name — adding the crucial word “blockchain” — in November 2016. It operates an online store in China mainly selling maternal and infant clothing, cosmetics, and household goods. Its claims to any involvement in blockchain technology are dubious at best.
The most widely cited poster boy of companies cynically adding blockchain to their name is New York’s Long Island Iced Tea. The company became Long Blockchain Corp at the end of last year and saw share prices rise by 200 percent. Similarly, Essex-based On-line Plc became On-line Blockchain Plc and its shares rocketed by a whopping 394 percent in a single day in October 2017. Colorado medical device company Bioptix Inc. changed its name to Riot Blockchain last year and was hit with a subpoena from the SEC in April. Clearly, the maneuver failed to pass the regulator’s sniff test.
The SEC Is Becoming Flexible, but Not That Flexible
The SEC decided against taking action against the issue of DAO tokens mid-last year, despite finding they met the conditions of securities pursuant to the Howey Test. Recently, they have all-but definitively declared that bitcoin and ether are not securities subject to regulation. And now, the SEC is considering allowing bitcoin ETFs to be listed on the NYSE.
That cautious tolerance toward at least some cryptocurrencies and some cryptocurrency activity does not extend to companies that add attention-grabbing words to their names in the hope of luring investors and hoping for a stock price bounce. Per Robert Cohen, Chief of the SEC Enforcement Division’s Cyber Unit:
“This case is a prime example of why the SEC has warned retail investors to be cautious before buying stock in companies that suddenly claim to have a blockchain business. This case involved both a trading suspension and people holding restricted shares who attempted to profit from the dramatic price increase with illegal stock sales that violated the registration statement.”
UBI shares currently trade for around $2.50, having peaked at over $72 in December last year.
Have your say. Should companies who add the word blockchain to their name and people selling shares in them at inflated prices be punished, or should investors be more discerning?
Images via Pixabay