SEC, Bitcoin and Unregistered Offerings

by Dorsey & Whitney LLP
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Bitcoin has been a much discussed item recently. The virtual currency is a digital representation of value that is traded and can serve as a medium of exchange. There are websites that use it. At one time there was a stock exchange called the Global Bitcoin Stock Exchange which apparently listed shares valued in the medium but is now out of business. And, there are trading platforms that use bitcoin such as the MPEx based in Romania.

Now the Commission has brought an administrative proceeding involving two offerings of unregistered securities valued in bitcoin. In the Matter of Erik T. Voorhees, Adm. Proc. File No. 3-15902 (June 3, 2014). The offerings involved shares of FeedZeBirds and SatoshDICE. The former pays individuals who use Twitter a fee in bitcoins in exchange for forwarding sponsored text messages. At one time Mr. Voorhees co-owed the firm which had a website that launched in April 2012. The latter is a gambling website that takes bets and pays out winnings in bitcoins. Mr. Voorhees launched the site in April 2012 but has since sold his interest.

In May 2012 FeedZeBirds offered 30,000 shares for sale to the public. This represented about 30% of the shares. They were priced at 0.08667 bitcoins per share and were listed on the Global Bitcoin Stock Exchange. The sale of the shares was announced on the website FreedomsPhoenix.com under the heading “FeedZeBirds IPO.” Overall the offering raised 2,600 bitcoins. At the time the bitcoins were worth about $15,000. No prospectus was filed with the Commission.

Two offerings of shares in SatoshiDICE were made. The first began in August 2012 and continued into January 2013. A prospectus that was widely available on the internet stated SatoshiDICE was trying to “raise IPO capital” through an equity offering by selling 10% of its 100,000,000 shares. After the completion of the IPO shares would pay dividends equal to 100% of the net profits, according to the prospectus. The offering raised 34,500 bitcoins worth, at that time, about $371,910.

The second offering took place in February 2013. SatoshiDICE offered an additional 3 million shares priced between 0.0044 and 0.0062 bitcoins per share. It raised 16,100 bitcoins valued at about $337,827. A prospectus was not filed with the Commission for either offering.

Subsequently, Mr. Voorhees announced on the Bitcoin Forum that SatoshDICE would be sold. Prior to the sale it would repurchase all of the outstanding shares at 0.0035 bitcoins per share. This represented a 277% premium over the share price that SatoshiDICE received in the sale of the company and about a 175% premium over the current market prices for the shares on MPEx. All 13 million outstanding shares were repurchased for a total price of 45,500 bitcoins. This meant that investors were paid the equivalent of approimately $3.8 million on the repurchase compared to the $722,659 originally raised due at least in part to a significant increase in the exchange rate. The Order alleges violations of Securities Act Sections 5(a) and 5(c).

Mr. Voorhees resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to comply with an undertaking not to participate directly or indirectly in the issuance of any security in an unregistered transaction in exchange for bitcoins or any other virtual currency for a period of five year. In addition, Mr. Voorhes will pay disgorgement of $15,000 along with prejudgment interest and a penalty of $35,000.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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