Recently, the SEC used its authority in Section 12(k) of the Securities Exchange Act of 1934 to suspend trading in the stock of four issuers that claim to have blockchain-related businesses, frequently citing “concerns regarding the accuracy and adequacy of information in the marketplace about, among other things, the nature of the company’s business operations and the value of its assets, including in press releases.” See “SEC Suspends Trading in Three Issuers Claiming Involvement in Cryptocurrency and Blockchain Technology,” SEC Press Release 2018-20 (February 16, 2018), https://www.sec.gov/news/press-release/2018-20.
The trading suspensions implicate . That rule requires a broker-dealer, prior to publishing quotations in a “quotation medium” (like OTC Markets, f/k/a the Pink Sheets) for an issuer’s stock, to gather information about the issuer, including financial information, that must be reasonably current in relation to the day that the quotation would be published, and which the broker-dealer has a reasonable basis to believe is accurate in all material respects and that the sources of the information are reliable. Because the SEC has called into question the accuracy of the business, assets, and public information about these issuers, it will be very difficult to satisfy this requirement. That likely means that there will be no market for the issuer’s shares when the trading suspension ends. The recent suspensions last 10 business days and will disqualify the stock from a major exception to the information-gathering requirement.
The trading suspensions reflect the SEC’s concern about the public market for the respective issuer’s stock. This appears be another avenue that the SEC will continue to use to dampen what it perceives to be irrational exuberance for a company’s stock based on potentially unfounded claims about the use of, or association with, blockchain technology and cryptocurrencies.
The recent trading suspensions are:
- UBI Blockchain Internet Ltd. (UBIA) (January 5, 2018), a public reporting and publicly-traded company, “because of (i) questions regarding the accuracy of assertions, since at least September 2017, by UBIA in filings with the Commission regarding the company’s business operations; and (ii) concerns about recent, unusual and unexplained market activity in the company’s Class A common stock since at least November 2017.” https://www.sec.gov/litigation/suspensions/2018/34-82452.pdf; https://www.sec.gov/litigation/suspensions/2018/34-82452-o.pdf.
Volume in the company’s shares spiked in December 2017 and the price shot up to about $90 per share. https://www.otcmarkets.com/stock/UBIA/chart. This contrasts with the fact that, as disclosed in the UBIA Form 10-K filed on December 7, 2017, its accountants issued a “going concern” qualified opinion. https://www.sec.gov/Archives/edgar/data/1500242/000149315217014295/form10-k.htm#a_001. Note that UBIA incorporated key terms in the company name, which was adopted in May 2017, although the company formerly had nothing to do with Blockchain and little to do with the “Internet of Things” that it states is the basis of its present business model.
- Cherubim Interests, Inc. (CHIT) (February 15, 2018), citing concerns about the accuracy of statements concerning “CHIT’s acquisition of AAA-rated assets from a subsidiary of a private equity investor in cryptocurrency and blockchain technology, among other things, and CHIT’s execution of a financing commitment to launch an initial coin offering,” and its delinquency in filing reports under the Securities Exchange Act of 1934. https://www.sec.gov/litigation/suspensions/2018/34-82724-o.pdf.
- PDX Partners, Inc. (PDXP) (February 15, 2018), citing “concerns regarding the accuracy and adequacy of information in the marketplace about, among other things, the nature of the company’s business operations and the value of its assets, including in press releases issued beginning on January 4, 2018 about PDXP’s acquisition of AAA-rated assets from a subsidiary of a private equity investor in cryptocurrency and blockchain technology, among other things.” https://www.sec.gov/litigation/suspensions/2018/34-82725-o.pdf
- Victura Construction Group, Inc. (VICT) (February 15, 2018), citing “concerns regarding the accuracy and adequacy of information in the marketplace about, among other things, the nature of the company’s business operations and the value of its assets, including in press releases issued beginning on January 4, 2018 about VICT’s acquisition of AAA-rated assets from a subsidiary of a private equity investor in cryptocurrency and blockchain technology, among other things.” https://www.sec.gov/litigation/suspensions/2018/34-82726-o.pdf
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Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking. This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.