In 2012, Congress passed the Jumpstart our Business Startups or JOBS Act, which was designed to ease capital raising requirements for emerging growth companies which have $1 billion or less in annual revenue.
It was a big deal at the time – a bipartisan effort in Washington to show that the federal government could help small businesses after it bailed out Wall Street banks during the credit crisis. The JOBS Act streamlined registration requirements, making it easier to launch IPOs by bypassing certain accounting and disclosure requirements.
In other words, the JOBS Act was supposed to be a win for the little guy and help him raise capital to build small businesses efficiently and effectively.
In 2015, The Securities Exchange Commission introduced rules to the JOBS Act and put into place what is known as Regulation A+. The Reg A+ offering exemption was supposed to be another gain for small businesses. It allowed smaller companies to raise up to $50 million without having to incur many of the costs and burdens associated with a traditional Wall Street IPO.
Turns out, Reg A+ may be a spawning ground for cryptocurrency con artists.
The Wall Street Journal this month reported that the cryptocurrency company Longfin Corp. had its trading halted by the SEC, accusing the company and its CEO of securities fraud.
Longfin was slated to be one of the success stories of the cryptocurrency industry when it listed on NASDAQ in December under the JOBS Act Rules which made it easier for small companies to do IPOs.
“Shortly after Longfin began trading on NASDAQ and announced the acquisition of a purported cryptocurrency business, its stock price rose dramatically and its market capitalization exceeded $3 billion,” according to the Commission. “The SEC alleges that three executives then illegally sold large blocks of their restricted Longfin shares to the public while the stock price was highly elevated.”
Through their sales, the three collectively reaped more than $27 million in profits.
“Within days, the Longfin shares soared 13-fold, making the company worth $5.5 billion,” according to the Journal. “The SEC alleges that Longfin’s chief executive and associates effectively sold shares after the stock soared, in violation of securities rules, and it obtained a court order to freeze $27 million of the proceeds.”
Prior to the trading halt, Longfin shares traded on a rollercoaster, zooming up after the company said it acquired a cryptocurrency company and then falling sharply following its removal from the Russell 2000 small-cap stock index.
Longfin’s shares then shot up again on the day before shares were halted. At the time of the trading halt, Longfin’s market value had sunk from $5.5 billion to $2.1 billion.
Subsequently, the company disclosed the SEC probe and reported “material weaknesses” in its financial conditions.
It is likely that many other cryptocurrency and blockchain offerings will try to issue shares under Reg. A+.
That should be a concern to all investors, but particularly Mom and Pop investors saving for retirement. If a securities teacher was handing out grades to Reg A+ bitcoin and blockchain companies, they would likely receive Fs.
The lesson is simple. Beware the potential for investment fraud in Reg A+ offerings.
Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers. The firm may represent investors in cases against companies mentioned in this blog.
Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.