While the SEC’s repeated enforcement actions have reduced the frequency of new blockchain token sales, companies have continued to engage in them, sometimes without regard to prior SEC enforcement actions. On August 29, 2019, the SEC announced that it had settled charges against Bitqyck Inc. and its two founders. The settlement resolved a complaint filed by the SEC on the same date in the Northern District of Texas alleging, among other things, that Bitqyck and the individual defendants engaged in securities fraud and unregistered securities offerings, which resulted in purchasers of Bitqyck’s tokens losing more than two-thirds of their investments.
The SEC alleged that defendants offered two digital tokens in violation of the securities laws. The first, called “Bitqy,” would be used to pay rewards to consumers and merchants for transactions in both a global digital commerce marketplace Bitqyck claimed to have developed as well as on a Groupon-style “daily deals” platform called QyckDeals. Bitqyck was further alleged to have marketed Bitqy as representing ownership of one-tenth of one common share of Bitqyck through the use of a smart contract. The second token, called “BitqyM,” purportedly gave holders a share in a Washington State crypto-mining facility owned by Bitqyck that was powered by discounted electricity. Defendants raised more than $13 million from over 13,000 purchasers of these tokens.
According to the SEC’s complaint, the representations made to purchasers concerning the tokens’ features were almost entirely false. Bitqyck had not built a global digital commerce marketplace due to technical limitations. In addition, the transfer of common stock to Bitqy holders was not governed by a smart contract and no shares of Bitqyck stock or related dividends were ever transferred to Bitqy holders. With regard to BitqyM tokens, the company never owned or had any contractual rights in a digital asset mining facility in Washington State or anywhere else, nor did the company sign any contracts for discounted electricity. The SEC also alleged that both Bitqy and BitqyM tokens were investment contracts and thus securities, emphasizing the passive role of token holders and their expectation of profit from Bitqyck’s managerial efforts.
Finally, the SEC charged defendants with operating an unregistered digital asset exchange called “TradeBQ.” If buy and sell orders for Bitqy matched based on price, the platform automatically filled the order without advance notice to either party. Notably, Defendants had no discretion in prioritizing or approving trades, and neither the founders nor the company were counterparties to any transactions on the platform.
The SEC’s allegations are striking in that they couple accusations of outright securities fraud with charges based on making unregistered securities offerings. The allegations based on the failure to register the token sales are of particular concern to sellers of blockchain tokens, as it further evidences the SEC’s willingness to bring charges against sellers of blockchain coins and tokens that are not based on fraud.
Without admitting or denying the allegations, defendants consented to final judgments and injunctive relief. Bitqyck was required to disgorge more than $8.3 million and each of the individual defendants was required to disgorge in excess of $850,000.
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