United States: Bitcoin Investment Vehicles Beware – The SEC Is Watching

The Securities and Exchange Commission (SEC) recently charged the co-owner of two Bitcoin-related websites for publicly offering shares in the ventures without registering the securities under the Securities Act of 1933 (the Securities Act).1 In the Matter of Erik. T. Voorhees (Voorhees) is the most recent effort by the SEC to exercise regulatory authority over virtual currencies, including Bitcoin. The Voorhees case and an earlier case, SEC v. Trendon T. Shavers and Bitcoin Savings and Trust (Shavers) provide valuable insights into the scope of the SEC's authority to regulate virtual currencies.2

Bitcoin has been described as a "techno tour de force"3 by Bill Gates. Fred Wilson of Union Square Ventures believes Bitcoin is a technology with "world changing" promise.4 The virtual currency has been derided by others as a "shady online currency" and as "a virtual Wild West for narcotraffickers and other criminals."5

While there is disagreement over the potential economic and legal impact of the virtual currency, Bitcoin has been described as the "internet's favorite virtual currency."6 The expanding acceptance of Bitcoin appears to signal that the virtual currency may be entering the mainstream. Despite this enthusiasm and acceptance, the SEC's role in regulating virtual currencies remains unclear.

Bitcoin 101

Bitcoin is a digital, private crypto-currency that can be "mined" by anyone. Mining requires the ability to solve a complicated mathematical algorithm. Bitcoin originated as a single source code by an anonymous creator, but is now continuously distributed on an open-source, non-proprietary, peer-to-peer network. Once mined, Bitcoins can be exchanged and traded on online exchanges for conventional currencies, such as U.S. dollars, or used to purchase goods and services from vendors accepting Bitcoins. Bitcoins are identified by a public "key" – like an account number – and protected by a private "key." Transactions are recorded on a "block chain," a universal public ledger which can be viewed by any computer on the Bitcoin network.

Created in 2008, Bitcoin was the first major crypto-currency on the market. It remains the most recognized and successful of the over 100 virtual currencies in existence. Today, over 12 million Bitcoins are currently in circulation and are worth an estimated $7 billion. While Bitcoins may not be held in ones hands, this has not slowed the use of Bitcoins in the digital currency market. Currently, Bitcoin ATMs have been installed in Austin, Boston, Las Vegas, Seattle, and Vancouver, with New York City next in line.

Bitcoin allows users to access the network anonymously which attracts users with nefarious intentions such as drug trafficking and money laundering. Bitcoin exchangers are required to comply with the Bank Secrecy Act7 and sellers of interests in collective Bitcoin investment vehicles are subject to SEC regulations. The continued growth of Bitcoin and the failure of some of its exchanges, including the $550 million failure of the Bitcoin exchange Mt. Gox, have spurred the SEC to address the regulation of virtual currencies.

For virtual currencies to be regulated by the SEC, the offering must be deemed a "sale of a security." Like other federal agencies including the Commodity Futures Trading Commission (CFTC) and the U.S. Treasury through the Financial Crimes Enforcement Network (FinCEN), the SEC is currently exploring its ability to regulate Bitcoin. To date, the SEC has exercised its authority over parties that have sold unregistered securities in companies that invest in Bitcoins or collective investment schemes that invest in virtual currencies.

SEC Actions Against Bitcoin Investment Schemes

The SEC has initiated two enforcement actions against parties allegedly selling unregistered securities in collective investment schemes focusing on Bitcoin.

In the Matter of Erik. T. Voorhees

The SEC most recently initiated an enforcement action earlier this month against the operator of a purported Bitcoin investment scheme in Voorhees.8 The SEC action was based on the unregistered offerings of shares of FeedZeBirds and SatoshiDICE, two separate entities co-owned by Voorhees and others. In May 2012, FeedZeBirds offered and sold 30,000 shares, and raised 2,600 Bitcoins in connection with that unregistered offer and sale. At the time of the FeedZeBirds offering, the value of the Bitcoins raised was approximately $15,000. From August 2012 through February 2013, in two separate offerings, SatoshiDICE offered and sold 13 million shares, and raised 50,600 Bitcoins in connection with those unregistered offers and sales. At the time of the SatoshiDICE offerings, the value of the total Bitcoins raised was approximately $722,659. In July 2013, SatoshiDICE bought back all outstanding SatoshiDICE shares from investors at a price of 0.0035 Bitcoins per share, for a total of 45,500 Bitcoins. Due to the significant rise in the exchange rate of Bitcoin, the total amount paid to investors in the SatoshiDICE buy-back transaction (approximately $3.8 million) exceeded the total USD amount raised.

The SEC investigation found that Voorhees published prospectuses on the Internet and actively solicited investors to buy shares in FeedZeBirds and SatoshiDICE. The SEC alleged Voorhees violated Sections
5(a) and 5(c) of the Securities Act, which prohibit the direct or indirect sale of securities, offer to sell or offer to buy securities through the mail or interstate commerce unless a registration statement has been filed or is in effect.

Voorhees agreed to settle the SEC's charges by disgorging $15,843.98 in profits plus a $35,000 penalty for a total of more than $50,000. The SEC stated: "[a]ll issuers selling securities to the public must comply with the registration provisions of the securities laws, including issuers who seek to raise funds using Bitcoin"9 and that the agency "will continue to focus on enforcing our rules and regulations as they apply to digital currencies."10

However, the SEC did not address the issue of whether Bitcoins or other virtual currencies are securities. The SEC focused on the unregistered offerings of shares of FeedZeBirds and SatoshiDICE that were priced in Bitcoins as the basis for the enforcement against. This approach appears to be an extension of the rationale articulated in the Shavers case which dealt with the regulation of Bitcoin investment vehicles.

SEC v. Trendon T. Shavers and Bitcoin Savings and Trust (BST)

In Shavers, a well-publicized case involving the SEC's regulation of Bitcoin investment schemes, the SEC alleged that Shavers and BST engaged in the fraudulent offer and sale of securities without registration under the Securities Act. The SEC claimed that, during the relevant period, Shavers obtained at least 700,467 Bitcoins in principal investments from BST investors, or $4,592,806 in U.S. dollars, based on the daily average price of Bitcoin when the BST investors purchased their investments. In Shavers, the alleged organizer of a Ponzi scheme advertised a Bitcoin "investment opportunity" in an online Bitcoin forum. The SEC claimed investors were promised up to 7 percent (7%) interest per week and that the invested funds would be used for Bitcoin arbitrage activities in order to generate the returns. Instead, the invested Bitcoins were allegedly used to pay existing investors and exchanged into U.S. dollars to pay the organizer's personal expenses.

In a memorandum regarding the court's subject matter jurisdiction, the court analyzed whether, as a matter of law, BST's solicitations to entice persons to invest in Bitcoin-related investments opportunities constituted the "sale of securities." In addressing the issue, the court analyzed whether the investment opportunities fell within the scope of the term "security."

Citing Section 2(a)(1) of the Securities Act, the court noted that the term "security" is defined as "any note, stock, treasury stock, security future, security-based swap, bond . . . [or] investment contract . . . "11 The court applied the three-part test articulated by the U.S. Supreme Court in SEC v. W.J. Howey Co.12, to determine whether an offering, contract, transaction, or scheme constitutes an investment contract.13 Under the Howey test, a contract, transaction, or scheme is an "investment contract" if it involves: (i) the investment of money; (ii) in a common enterprise; and (iii) with the expectation of profits to come solely from the efforts of others.

The court in Shavers held that all three prongs of the Howey test were satisfied and, thereby, the sale of interests in the trust constituted the sale of securities.14 In its analysis, the court found:

  • That because Bitcoin can be used as money to purchase goods or services and also can be exchanged for conventional currencies, that Bitcoin was in fact a currency or form of money;
  • That the investors and the promoter were interdependent because the investors were dependent on Shavers's expertise in Bitcoin markets and his local connections; in addition, Shavers allegedly promised a substantial return on their investments as a result of his trading and exchanging Bitcoin; and
  • Investors participating in the BST investments were expecting profits from the efforts of Shavers.

Based on these findings, the court concluded that the BST investments met the definition of "investment contract," and as such, were securities. It should be noted that the court did not address the issue of whether Bitcoins constitute securities, but rather focused on the system or scheme through which the investments in Bitcoins were being made.

The definition of "security" under the Securities Act does not include currencies. However, the SEC has argued that investments in Bitcoin-related schemes are investment contracts – a contract, transaction, or scheme involving: (i) an investment of money, (ii) in a common enterprise, (iii) with the expectation that profits will be derived from the efforts of the promoter or a third party.


Media reports have mistakenly claimed the SEC and courts have concluded that Bitcoins are securities. In reality, the SEC has stated that the sale of shares in collective investment schemes that focuses on virtual currencies, or parties that sell shares in companies that invest in virtual currencies, will be deemed a sale of securities. However, the sale of virtual currencies does not appear to fall within the scope of the definition of securities set forth in Section 2(a)(1) of the Securities Act. Given our view that the SEC does not have the authority to regulate virtual currencies, investors should be aware that the CFTC, FinCEN and state regulators continue to explore their authority to regulate the sale and use of virtual currencies.

Any firm that is planning to trade in or develop a platform to facilitate the trading of virtual currencies should proceed with caution. Similarly, anyone looking to invest in a collective investment vehicle that focuses on virtual currencies should make sure the vehicle is properly structured to comply with the securities laws. Due to the lack of clearly defined guidance with respect to the authority of the SEC, the CFTC, FinCEN and state regulators to supervise virtual currencies, it is important that you engage experienced counsel to assist you in navigating the regulatory requirements that may apply to any business you are building.


1 See "SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities," SEC Press Release (June 3, 2014).

2 SEC v. Shavers, Memorandum Opinion Regarding the Court's Subject Matter Jurisdiction, Case No. 4:13-CV-416, dkt. No. 23 (E.D. Texas Aug. 6, 2013).

3 See "Munger/Buffett Disagree on Corporate Tax Rates," Fox Business (May 6, 2013).

4 See Fred Wilson, "Here's Why I'm Investing in Bitcoin," Business Insider (May 9, 2013).

5 See New York State Department of Financial Services, Notice of Inquiry on Virtual Currencies (Aug, 12, 2013) (noting "[T]he Department of Financial Services (DFS) has launched an inquiry into the appropriate regulatory guidelines that it should put in place for virtual currencies.").

6 See Matthew Boesler, "Analyst: The Rise of Bitcoin Teaches a Tremendous Lesson About Global Economics" Business Insider (Mar. 7, 2013).

7 Currency and Foreign Transactions Reporting Act of 1970, 31 U.S.C. § 5311 et seq.

8 In the Matter of Erik T. Voorhees, Order Instituting Cease-And-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-And-Desist Order, Admin. Pro. File No. 3-15902, Release No. 9592 (June 3, 2014).

9 SEC Press Release, SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities (June 3, 2014).

10 Id.

11 15 U.S.C. § 77b.

12 328 U.S. 293 (1946).

13 SEC v. W.J. Howey, Co., 328 U.S. 293 (1946); see also Intern. Bhd. of Teamsters v. Daniel, 421 U.S. 837, 852 (1979) (noting that the Howey test is not the only test for determining a security, but has been held to embody "all the attributes that run through all of the Court's decisions defining a security.").

14 See Shavers (emphasis added).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions