An attorney and the business affairs manager of his law firm agreed to settle SEC charges of illegally selling shares of a company focused on the application of blockchain technology for food, drugs and healthcare.

According to the SEC Complaint, in October 2017, the defendants received several thousand restricted shares of stock in UBI Blockchain Internet Ltd. ("UBI") in exchange for providing legal services which included the firm's preparation of a registration statement. The defendants were required by the registration statement to execute any sales of their restricted shares at the fixed price of $3.70 per share. As alleged, UBI's stock price rose from approximately $4 per share to a high of approximately $115 per share by mid-December; the registration was declared effective on December 22, 2017 and the defendants sold approximately 50,000 UBI shares at prices between $21 and $48, netting a total profit of approximately $1.4 million. The defendants' sales ceased when the SEC suspended trading in UBI stock on January 8, 2018.

The SEC charged the defendants with violating Sections 5(a) and 5(c) of the Securities Act by selling UBI shares in excess of the fixed price established in the registration statement. According to the SEC, a fixed price was required because UBI's offering was a "primary offering" consisting of a significant portion of its common stock, and did not qualify as an "at the market offering." The defendants had prepared two opinion letters stating that the UBI shares issued to them were "free trading securities," which successfully convinced UBI's transfer agent to remove the restrictive legends from their share certificates.

The defendants agreed to pay $1.4 million in disgorgement and an additional $188,682 in civil money penalties. The defendants will also be permanently enjoined from future unregistered securities sales.

Commentary / Joseph V. Moreno

The UBI matter involves several red flags consistent with what the SEC has been warning retail investors to be on the alert for, including a vaguely-defined business plan, unconfirmed overseas operations in China, and skyrocketing share prices based presumably on an irrational exuberance relating to blockchain technology. The SEC's announcement of the settlement included links to its Investor Bulletin on Initial Coin Offerings and its mock ICO website, both of which contain extensive investor warnings about fraud and bogus investments involving blockchain and cryptocurrency. While investors would be wise to heed these warnings, companies considering involvement with cryptocurrency exchanges and ICOs should keep in mind that regulatory scrutiny of this technology is likely to continue for the foreseeable future.

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