Along with other regulators, the Securities and Exchange Commission (the “SEC”) has been signaling its intention to pursue those in the cryptocurrency sphere that it believes are capitalizing on the excitement and novelty of cryptocurrencies by engaging in illicit conduct. Recently, the SEC took action against one such entity, a Dallas-based cryptocurrency dealer called Bitqyck Inc. (“Bitqyck”). On August 29, 2019, the SEC announced that it had reached a settlement with Bitqyck and its founders for approximately $10.1 million. The SEC’s actions demonstrate that institutional investors may be best served by exercising reasonable due diligence, instead of solely relying on the representations made by cryptocurrency issuers, when determining whether to invest in a venture.
The SEC’s complaint against Bitqyck, which was filed in the United States District Court for the Northern District of Texas, alleged that Bitqyck and its founders, Bruce Bise and Sam Mendez, defrauded investors and operated an unregistered exchange. It charged Bitqyck, Bise and Mendez with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act, as well as Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. It also charged Bitqyck with violating Section 5 of the Exchange Act and Bise and Mendez with aiding and abetting that violation.
The SEC’s complaint painted a picture of deception that infused nearly every aspect of Bitqyck’s business model. The complaint alleged that Bitqyck, which is owned and operated by Bise and Mendez, mass-marketed two digital tokens, Bitqy and BitqyM, to prospective investors in 45 US states, two US territories, and 20 countries through multiple unregistered digital asset securities offerings. According to the SEC, the company raised more than $13 million from more than 13,000 investors who collectively lost over two-thirds of their investments. The defendants allegedly falsely represented to investors that if they purchased a Bitqy token, they would automatically receive one-tenth of one share of Bitqyck common stock through the operation of a “smart contract” associated with the token. In truth, however, there were no such “smart contracts” and the investors never received any Bitqyck common stock. Further, the defendants allegedly touted a global marketplace called QyckDeals, which they billed as a daily deals site like Groupon, but which did not really exist; they falsely claimed that Bitqyck owned a cryptocurrency mining facility in the state of Washington from which investors could profit; and they created an online trading platform called TradeBQ, which they failed to register with the SEC.
The complaint sought permanent injunctions, the disgorgement of ill-gotten gains with interest, and civil monetary penalties. Without admitting or denying any wrongdoing, Bitqyck, Bise and Mendez consented to the injunctive relief and Bitqyck also consented to an order requiring that it pay disgorgement, prejudgment interest and a civil penalty of $8,375,617. Bise and Mendez consented to the entry of an order that they each pay disgorgement, prejudgment interest and a civil penalty of $890,254 and $850,022, respectively.
The SEC’s action against Bitqyck and its founders, as well as the hefty amount of the penalties imposed, is another sign of the SEC’s increased focus on regulating the developing cryptocurrency market. It is also in alignment with statements made by the SEC making clear that it is a company’s—not the SEC’s—burden to demonstrate that the relevant cryptocurrency is not a security and, thus, not subject to applicable securities’ laws and regulations. It appears that investors or potential investors may have had reservations about Bitqyck even before the SEC’s action, as evidenced by online articles pondering the legitimacy of the company. Individuals and institutions seeking to invest in the cryptocurrency realm may choose to approach it with a healthy dose of apprehension and remember that if it sounds too good to be true, it probably is.
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