As I previously discussed in my blog here, the SEC does not have a mandate to regulate Bitcoin. Not unless it is used in a securities offering, especially in an unregistered initial public offering conducted over the Internet in violation of the securities laws. As Andrew J. Ceresney, director of the SEC's Division of Enforcement said, "We will continue to focus on enforcing our rules and regulations as they apply to digital currencies."
This was the case when the SEC issued a cease-and-desist order on June 3, 2014 against Erik T. Voorhees, a 29-year old Bitcoin activist, for "publicly offering shares in the two [Bitcoin-related] ventures without registering them." The SEC's press release is here.
What Mr. Voorhees did was pretty straight forward: he published prospectuses on the Internet and solicited the general public to buy shares of his online ventures, SatoshiDICE and FeedZeBirds. The only problem was that Mr. Voorhees neglected to register the offerings with the SEC or conduct them in compliance with an available exemption from registration. It looks like Mr. Voorhees never bothered with retaining a securities lawyer (or any corporate lawyer for that matter) to advise him. I used to give a talk to the entrepreneurs awhile back, listing the top ten legal mistakes that many of them make. Conducting a securities offering without even realizing it was #8 on my list. It appears that Mr. Voorhees did just that.
The first unregistered offering took place in May 2012, when FeedZeBirds issued 30,000 shares in exchange for 2,600 bitcoins. The price per bitcoin was around $5 back then, so overall he received $15,000. FeedZeBirds promised to pay bitcoins to Twitter users who would forward its sponsored text messages. The shares of FeedZeBirds were listed on an entity known as the Global Bitcoin Stock Exchange, which operated the Bitcoin stock exchange. Although Mr. Voorhees published a prospectus for this offering, it was never filed with the SEC. Mr. Voorhees also engaged in general solicitation to sell the FeedZeBirds shares over the Internet (on website BitcoinForum, Facebook and other Bitcoin-related websites).
Then, SatoshiDICE sold 13 million shares for 50,600 bitcoins ($722,659 in total) in offerings conducted from August 2012 through February 2013. SatoshiDICE was a gaming site that paid winnings in bitcoins. The shares of SatoshiDICE were listed on MPEx, a Bitcoin trading platform based in Romania. Mr. Voorhees issued a prospectus for these offerings, and it was broadly disseminated over the Internet. Mr. Voorhees again engaged in general solicitation by advertising the offering on various websites. However, in July 2013, Mr. Voorhees announced that SatishiDICE was being sold, and that prior to the sale it would buy back all outstanding shares from investors. Given that the exchange ratio between Bitcoin and USD had significantly appreciated, the repurchase price that was offered was at 277% premium over the original share sale price. So, investors who in aggregate invested $722,659 just a year or so before were paid back approximately $3.8 million. Not a bad return.
As a penalty for violating securities laws, Mr. Voorhees agreed to pay back $15,000 from the FeedZeBirds offering and a fine of $35,000. In addition, he agreed not to participate n any issuance of any security in an unregistered transaction in exchange for any virtual currency including Bitcoin for five years.
According to the new rule 506(d) that I described here, the entry of the SEC cease-and-desist order makes Mr. Voorhees a "bad actor" and disqualifies him from relying on Rule 506(b) and 506(c) of Regulation D. That, in my opinion, is worse than the financial penalties as it prevents Mr. Voorhees from participating in any Rule 506 private placement for at least a year.
In conclusion, it is clear that the SEC is paying particular attention to the investment funds or ventures that involve Bitcoin or other virtual currencies. Only last year, the SEC charged Trendon Shavers with defrauding investors in a Bitcoin-related Ponzi scheme. I wrote about it here. Founders of Bitcoin-related enterprises should be aware of this attention, and should make sure that they are in full compliance with the U.S. federal securities laws.
This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga. Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.