Over the last two months, the Texas State Securities Board (“Securities Board”) has published four emergency cease and desist orders alleging violations of the Texas Securities Act involving the offer and sale of cryptocurrencies. The fact that the Securities Board has issued four orders pertaining to cryptocurrencies shows that the Securities Board intends to make regulation of cryptocurrencies a priority. It is also expected that Texas could “take the lead” in regards to state regulation of cryptocurrencies. This follows last year’s announcement by the Securities and Exchange Commission that it intends to make the regulation of cryptocurrencies a priority this year in light of the fact that the cryptocurrency market has been growing over the years.
The Securities Board issued its first order involving cryptocurrencies on December 20, 2017 against a foreign firm called USI-Tech Limited. According to the order, USI-Tech Limited and its agents offered Texas investors investments “in a series of Bitcoin mining contracts.” The order alleged that these offers violated the Texas Securities Act because the investments, which were determined to be securities, were not registered in Texas. USI-Tech Limited’s agents also allegedly were not registered as Texas dealers or agents, and no applicable exceptions applied. The order also alleged that USI-Tech Limited and its agents made material misrepresentations and omissions concerning the offers.
In January of this year, the Securities Board issued two separate orders pertaining to cryptocurrencies. The first order, published on January 4, was against BitConnect, a British “Bitcoin and crypto-community platform designed to provide multiple investment opportunities.” BitConnect allegedly offered interests in cryptocurrency-based programs that it promised would produce annualized returns of 100 percent or more. The Securities Board concluded that these interests were securities and alleged in the order that BitConnect had violated the Texas Securities Act by not registering them. The order also alleged that Bitconnect made various material misrepresentations and omissions in the sale of these interests, including failure to disclose its principals’ identities and the location of its principal place of business.
The next order, published on January 24, was against R2b Coin, a Hong Kong-based company that offered a cryptocurrency known as “r2b coin” to Texas investors. According to the Order, the Securities Board concluded that r2b coin was a security and alleged that R2b Coin violated the Texas Securities Act by failing to register r2b coin as a security. The order also alleged that, like USI-Tech Limited and Bitconnect, R2b Coin made material misrepresentations and omissions in the sale of the cryptocurrency, such as claiming that its owner was a “licensed securities dealer” when in fact it was not.
The Securities Board’s latest order, published on February 3, was against DavorCoin, a Scottsdale, Arizona-based company. According to the Securities Board’s order, DavorCoin offered investments in a cryptocurrency lending program based on a cryptocurrency called “davorcoin.” Just as it did in the previous orders, the Securities Board concluded that davorcoin was a security and alleged that DavorCoin was violating the Texas Securities Act by failing to register davorcoin as a security. The order also alleged that DavorCoin made material misrepresentations and omissions in the sale of the cryptocurrency, such as claiming that davorcoin owners could soon use the product to purchase goods and services when there was allegedly no evidence that DavorCoin had persuaded any merchants to accept the cryptocurrency.
According to commentators, states other than Texas have also taken steps toward regulating cryptocurrencies. For example, Massachusetts, North Carolina, Florida, and Kansas published investor alerts pertaining to cryptocurrencies. After the Texas Securities Board published its order against BitConnect, the North Carolina Securities Division followed suit with a temporary cease-and-desist order against BitConnect.
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