On August 29, 2019, the SEC issued a final judgment as to Bitqyck Inc. (“Bitqyck”) and its founders (Bruce Bise and Sam Mendez) concerning the defendants’ conduct with respect to the sale of digital tokens and the failure to register as a national securities exchange. The order was part of a settlement between the defendants and the SEC.
Bitqyck’s founders allegedly mass-marketed two tokens called “Bitqy” and “BitqyM” – both as standalone assets and as a “reward” alongside other products – to more than 13,000 investors located in 45 states and 20 countries. In total, those sales allegedly raised proceeds worth more than $13 million for Bitqyck. Bitqyck also allegedly created and maintained TradeBQ.com, a continuously available online trading platform that permitted investors to post bids and offers in Bitqy to be exchanged for Bitcoin.
The SEC filed a complaint against Bitqyck and its founders, alleging that they sold unregistered securities in violation of Sections 5(a) and (c) of the Securities Act; made material misrepresentations in violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act; failed to register as a national securities exchange in violation of Section 5 of the Exchange Act; and aided and abetted the failure to register as a national securities exchange. The SEC sought (among other things) the return of all “ill-gotten gains” associated with the more than $13 million in proceeds from the token sales, prejudgment interest, and a monetary penalty.
Applying the test set forth in SEC v. W.J. Howey Co., the SEC alleged that “Bitqy” and “BitqyM” tokens were unregistered securities because: (1) investors paid money for the tokens; (2) investors’ success was linked directly to Bitqyck’s efforts in attracting new investors and operating a cryptocurrency mining facility; and (3) investors had a passive role in the project and an expectation that their investments would appreciate in value as a result of Bitqyck’s efforts in operating its business and listing the tokens on exchanges.
The SEC also alleged that Bitqyck made material misrepresentations by (1) representing that purchasers of Bitqy tokens would automatically be issued 1/10 of a share of Bitqyck common stock for each token purchased through operation of a “smart contract” but failing to transfer any Bitqyck common stock to token purchasers, (2) representing that Bitqyck would drive the value of Bitqy tokens through its “QyckDeals” platform but in fact lacking the technological capability to create the “QyckDeals” platform, and (3) representing that Bitqyck owned a cryptocurrency mining facility (powered by electricity that it purchased at below-market rates) from which investors would receive the right to profit but in fact not owning such a facility.
In addition, the SEC alleged that the TradeBQ.com platform’s functionality required Bitqyck to register as a national securities exchange but that Bitqyck had failed to do so, thereby violating the federal securities laws.
The final judgment entered as part of the settlement (1) enjoined the defendants from violating Sections 5 and 17(a) of the Securities Act and Sections 5 and 10(b) of the Exchange Act; (2) required the defendants to disgorge approximately US $8,375,617 in profits and pay approximately US $890,254 in prejudgment interest; and (3) required the defendants to pay a US $850,022 monetary penalty. Bitqyck and its founders did not admit or deny the SEC’s allegations.