Blockchain technology company Blockchain of Things Inc. (BCOT) settled charges brought against them by the Securities and Exchange Commission (SEC) on December 18, 2019, for conducting an unregistered initial coin offering (ICO). The New York-based startup Blockchain of Things conducted its ICO, in December of 2017, which was after the SEC had released its DAO Report Investigation, which reported that ICOs can in fact be securities offerings. This is the latest in the string of many cases that the SEC has been bringing against unregistered token offerings. As cryptoiq.co puts it, “Blockchain of Things (BCOT) is the latest ICO to get obliterated by the SEC.” The SEC has shown that it is serious about ensuring cryptocurrencies are not used as a runaround of United States securities laws.
On December 18, 2019, the Securities and Exchange Commission made an announcement that could be a very big deal for many companies that want to go public to raise money. This announcement was a proposal that shows that the SEC is hoping to update the definition of “accredited investor” so that more people will qualify as an accredited investor, thus giving the public greater access to investments, and companies greater access to potential sources of cash flow.
SEC Chairman Jay Clayton said: “The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth. Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication. I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”
The Boston and New York SEC and DOJ Charge Kenneth Ciapala, Ulrik Debo, and Others in International Scheme
The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ} started the new year off with a bang, filing a flurry of legal actions against Kenneth Ciapala, Ulrik Debo, and a number of associates on January 2 and 3, 2020. Unusually, two different SEC regional offices took part in the investigations, and produced two separate complaints. One complaint, filed by the Boston Regional Office, charges Steve Bajic, Rajesh Taneja, Ciapala, Anthony Killarney, Christopher Lee McKnight, Andrew Dale Wise, and a number of nominee companies controlled by them with enabling public company control persons fraudulently to sell stock to retail investors in the U.S. over-the-counter securities market. A second complaint, filed by the New York Regional Office in the Southern District of New York, targets Ciapala and his company Blacklight SA, which has its headquarters in Switzerland.
The defendants reside in several different countries, and own nominee companies in many more. In its press release announcing the lawsuits, the SEC rather impressively thanks “the Federal Bureau of Investigation, the Alberta Securities Commission, the British Columbia Securities Commission, the Ontario Securities Commission, the Royal Canadian Mounted Police, the Cyprus Securities and Exchange Commission, the Hong Kong Securities and Futures Commission, the Malta Financial Services Authority, the Mauritius Financial Services Commission, the New Zealand Financial Markets Authority, the Panamanian Superintendencia del Mercado de Valores, and the Monetary Authority of Singapore.” The Financial Industry Regulatory Authority lent a hand as well, as did the U.S. Attorneys’ Offices for the Southern District of New York (SDNY) and the District of Massachusetts. The SDNY U.S. Attorney’s Office did more that provide information: on the same day, January 2, it unsealed an indictment charging Blacklight, Ciapala, and Ciapala’s associate Ulrik Debo with “engaging in a long-running stock manipulation scheme involving numerous United States issuers.” Debo and Ciapala had already been arrested in the United Kingdom, from which the U.S. Government will be seeking their extradition. Read More
The Securities and Exchange Commission (SEC) on December 18, 2019, voted to “propose rules that would require resource extraction issuers to disclose payments made to foreign governments or the U.S. federal government for the commercial development of oil, natural gas, or minerals.” Similar rules had previously been implemented by the agency U.S. District Court for the District Columbia and then disapproved by a joint resolution of Congress in 2016. Likely due to the importance of disclosures in the resource extraction industry, the SEC continued to attempt to navigate the legal necessities and implement rules that would be allowed by the Courts and Congress. You can read more about the new rules below:
As we write about often on our blog, the regulatory state of CBD is in flux, and owners of CBD companies should be aware of the challenges that they have to face in the current market. The world’s largest marketplace, Amazon.com, following the FDA’s finding that CBD cannot be ruled safe, has banned the sale of CBD products from their website. On the positive side, several months ago, the USPS decided that it would be legal for businesses to ship CBD and hemp products through its service, a position which has remained unchanged.
PRACTICAL CONSIDERATIONS IN REGULATION A+ OFFERINGS
On March 25, 2015, The Securities and Exchange Commission (the “SEC”) adopted final rules to implement Section 401 of The Jumpstart Our Business Startups (JOBS) Act by expanding Regulation A into two tiers. These changes have had a notable impact on companies raising capital and going public particularly companies quoted by the OTC Markets. As amended Regulation A provides unique benefits not present in traditional securities offerings registered with the SEC on Form S-1 or Form F-1.
On Wednesday, December 18, 2019, the SEC adopted new rules 15Fi-3, 15Fi-4, and 15Fi-5, which they describe as risk mitigation techniques for uncleared security-based swaps.
These rules “establish requirements for registered security-based swap dealers and major security-based swap participants (“SBS Entities”) to:
- Periodically reconcile outstanding security-based swaps with counterparties,
- Engage in certain forms of portfolio compression exercises, as appropriate, and
- Execute written trading relationship documentation with each of their counterparties prior to, or contemporaneously with, executing a security-based swap transaction.”
Janardhan Nellore, a 42 year old IT administrator, has been charged with using confidential earnings information, along with his friends, to trade on a Silicon Valley cloud-computing company that he was working for. The scheme netted him and his friends over $7 million. The company that he was working at is called Palo Alto Networks Inc. This company trades on the New York Stock Exchange and is worth billions of dollars. According to the SEC, Nellore used his “IT credentials and work contacts to obtain highly confidential information about his employer’s quarterly earnings and financial performance. As alleged in the complaint, until he was terminated earlier this year, Nellore traded Palo Alto Networks securities based on the confidential information or tipped his friends, Sivannarayana Barama, Ganapathi Kunadharaju, Saber Hussain, and Prasad Malempati, who also traded.” As Shaun Nichols comically puts it in his article on The Register, “IT isn’t supposed to stand for Insider Trading”.
Elizabeth Warren is currently running for President as a candidate for the Democratic Party. She is also currently a United States Senator from Massachusetts. She was formerly a Professor at Harvard Law School. She was recently a front-runner to win the Democratic primaries, but has seen a weakening of her polling position in the past few weeks. In a poll released this week by Emerson, she was a distant third place at 12%, behind Joe Biden’s 32% and Bernie Sanders’s 25%. That being said, she still has a decent chance, and has made her voice heard regarding her views on Wall Street and her desire to crack down on shady practices by the financial industry.