Commissioner Acts to Stop Two Cryptocurrency Offerings As Second Regulatory Sweep Concludes

Oct 17

The Texas State Securities Board this week finished its second regulatory crackdown on cryptocurrency offerings with two emergency actions against businesses claiming they have the expertise and financial strength to deliver high-yielding, no-risk returns.

Securities Commissioner Travis J. Iles said the orders conclude the agency’s second regulatory sweep of suspect cryptocurrency-related offerings. The sweep started in mid-June 2019 in response to the price of Bitcoin nearly tripling in the prior three months.

Emergency Cease and Desist Orders entered Oct. 15 against:

“We quickly learned that bad actors were continuing to capitalize on widespread interest in cryptocurrencies despite fluctuations in their prices and market value,” said Joe Rotunda, director of the Enforcement Division.

The Enforcement Division’s first sweep of cryptocurrency investment offerings started in December 2017, also in response to a sharp increase in the price of cryptocurrencies.

Since December 2017, Commissioner Iles has entered 26 administrative orders against 79 individuals and entities involved in cryptocurrency offerings. Several actions resulted in the offer of rescission to Texas investors.

Cryptocurrency-related cases have become a staple of the agency’s enforcement work.

In fiscal year 2019, which ended Aug. 31, 30% of the investigations opened by the Enforcement Division involved cryptocurrency offerings.

The two emergency cease and desist orders entered Oct. 15 cite offerings that are littered with traits common to suspect cryptocurrency-related investments. Among them: 

Claims of legitimacy

PK Crypto claims it is a “private legal US registered asset-management investment company.”  According to the order, the company is not registered either with Securities and Exchange Commission or the Texas State Securities Board and it is not registered with the Texas Secretary of State to do business in the state.

The company also claims the securities it issues trade on an over the counter market under the symbol GBTC. That ticker, however, belongs to an unrelated company. 

CypMiner claims it is a fully licensed company in the United Kingdom, but according to the order,  the registrar of companies in the UK has no record of the company.  A company promoter, Elizabeth Frazier,  is described as an “expert Bitcoin miner,” but Cyp Miner provides no information on her qualifications or experience. 

Online marketing

CypMiner is advertising investments tied to cryptocurrency mining on DealStream, an online marketplace with more than 500,000 members in 100 countries. DealStream facilitates the buying and selling of businesses, real estate, oil and gas assets, and private investments. 

PK Crypto has a robust social media campaign. It is advertising cryptocurrency investment plans through Twitter, LinkedIn, Facebook, and YouTube videos. 

No physical location 

Many promoters of suspect cryptocurrency offerings exist only on the internet.

PK Crypto lists offices in London, Vienna, Jakarta, and the Shanghai province of China. The company says its worldwide headquarters is in Waco, Texas.

According to the order, the street address in Waco does not exist.

Private offerings exempt from regulation 

CypMiner is attempting to deceive potential investors by claiming the investments are exempt from regulation, according to the order. Cyp Miner claims its investments are “private transactions” and exempt from federal securities laws and regulations.

The order, however, found that Cyp Miner was violating state registration laws, meaning the business was not exempt from state law.

The more you invest, the more you earn 

PK Crypto advertises that an initial investment of $2,500 to $4,999 can produce daily interest of 3.33% with a term of 30 days. Invest between $50,000 and $100,000 in the VIP Plan and earn daily interest of 14.28% with a term of seven days.

According to the order, PK Crypto is attempting to bolster its credibility by telling investors it works with legal counsel and an accounting firm that audits its annual financial statements.

However, the State Bar of Texas has no record of the named attorneys being licensed to practice law in Texas. PK Crypto’s purported accounting firm does not have any affiliation with the company.  

Investors must pay for the investments with bitcoin, one of the most widely used cryptocurrencies.

Recruiting unlicensed sales agents 

According to the order, Cyp Miner is recruiting existing investors to act as sales agents in bringing in new investors. The company is paying commissions of between 1% and 10% of the principal deposited by new investors. 

Cyp Miner is not verifying that the affiliates are registered to offer or sell securities, according to the order. Selling securities without being registered generally violates the Texas Securities Act.

No disclosure of risks

Investments tied to cryptocurrencies face a long line of risks, but according to both orders any risk disclosures are absent from the solicitations of investors. 

Risks include: Government regulation, volatility in cryptocurrency prices, hacking, competition with all other cryptocurrencies, and disruptions in the exchanges where cryptocurrencies are exchanged for fiat currencies like the U.S. dollar.

Emerging Investor Threat: Cryptocurrency Offerings

The TSSB has found widespread fraud in securities tied to cryptocurrencies.

Read the results of a four-week investigation in 2017-2018 into crypto offerings and ongoing enforcement efforts.