US Regulator Warns of Widespread Fraud in Cryptocurrency Offerings

Texas Securities Board has opened 32 investigations for a month

by Marin Marinov
11 April • 3 min
In Regulation

Fraud is widespread among cryptocurrency investment offerings, the Texas Securities Board (TSB) warned in report published on Tuesday. The state regulator has opened 32 investigations into cryptocurrency promoters for a month, with some of them closing their offerings.

Texas Securities Board started the four-week investigation on December 18, following the rapid rise of Bitcoin`s (BTC) price. The regulatory body investigated promoters of cryptocurrency investments – companies or individuals that use digital coins in an investment program and try to attract investors by advertisements. TSB does not have the power to regulate virtual currencies themselves because of their unclear legal status on both federal and state level.

Investigation results

The main focus of TSB`s investigation was to check if promoters use illegally and fraudulently online forms of advertisement to attract Texas investors. It inspected 32 cases and found 30 promoters that broadly and directly marketed Texans through online commercials, social media ads, and other online forms of promotional messages (company websites).

Moreover, none of the promoters were registered to sell securities in Texas, a violation of the Texas Securities Act (TSA), and at least six promoters recruited sales agents without verifying if they were registered. TSA and other federal and state laws generally require securities professionals such as cryptocurrency investment promoters and agents to register: a process of competency examination and background checks. The US has a central Broker Check System and Investment Adviser Registration Status Register.

For example, the regulator alleged R2B Coin of illegal activity because of its false claim that the company was a globally licensed dealer, which misled potential investors, suggesting false legitimacy and safety.

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During the one-month sweep Texas Securities Board found also that one company offered securities that are not registered for sale in Texas, which is banned under the state legislation, whereas five promoters ignored investing risks by advertising high returns, deemed as “outrageous claims of profitability”. The watchdog took action against crypto exchange BitConnect because of its promised returns of up to 40%. The company had no registration although its lending program was a security and should go through background check for fair, just and equitable offering. The regulator concluded that BitConnect was “a fraudulent scheme that threatened to inflict huge financial losses on Texans” and ordered to halt its operations.

In addition, the Texas regulator blamed six promoters for trying to pay a commission to investors who recruited other individuals and companies into the offering and one company (LeadInvest) for using misleading information and outside photographs, including a decade old one, to show profiles of its team of advisors and legal professionals.

Only 34%, or 11 promoters, had a publicly announced physical address. One of the alleged firms, DavorCoin, which promised 48% monthly returns, announced that its investors intentionally had hidden their identity information because of tax and regulation risks.

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Most of 32 companies had more than one violation. For example, Texas Security Board took action against USI-Tech Limited because it promoted 150% profits, offered unregistered securities and tried to pay investors who could recruit other new investors.

TSB`s report reminds investors that securities tied to cryptocurrency are regulated under US laws no matter if the promoters tried to give the opposite impression in their advertisements and on their websites.

The report showed that 56% of all cryptocurrencies securities are tied to BTC, 6% to ETH, 18% to other existing cryptocurrency and 20% to newly-released coins.

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