Official documentation released April 10 by the Texas State Securities Board (TSSB) outlines findings from 32 Enforcement Division investigations into cryptocurrency-related companies for possible fraud, which spanned a four-week period starting December 18, 2017.
The probe focused on investment promoters that used online ads, social media, and other methods of solicitation in Texas. Director Joe Rotunda of the TSSB Enforcement Division told ETHNews about how bad actors play confidence games like those used to swindle investors in conventional markets, but repackaged for the era of crypto:
"Their goal is to use the buzz as a tool to separate consumers, investors, and others from their money. It's happened before – I'm thinking specifically of the tech revolution around the 2000s and the subsequent proliferation of wide-spread internet use – and it's happening again with cryptocurrencies."
The key takeaways from the investigations are as follows:
- "No promoters were registered to sell securities in Texas, a violation of the Texas Securities Act;
- 30 promoters were broadly using websites, social media, and online advertising to market to Texans;
- Seven promoters were offering securities tied to a new cryptocurrency;
- At least five promoters all but ignored investing risks by guaranteeing returns, some as high as 40% per month;
- Only 11 promoters provided potential investors with a physical address;
- At least six promoters were actively recruiting sales agents without verifying they were registered with the Securities Commissioner; and
- Six of the offerings involved payment of a commission to investors who recruited new investors into the scheme."
The Enforcement Division began preparation for its investigative sweep in Texas on December 16, 2017, when the price of bitcoin was valued at over $19,000. "As the price of major cryptocurrencies spiked," noted the TSSB, "promoters of cryptocurrency investments ramped up their marketing to Texans … The potential to cash in on what could be a global revolution in web-based transactions has put investor enthusiasm into overdrive."
"In my experience," noted Rotunda, "the fraud we're seeing with investments tied to cryptocurrencies is the same type of fraud that we've investigated whenever new and exciting products are introduced into circulation or new markets emerge. Although many legitimate businesses work to develop these products and markets, promoters of fraudulent schemes attempt to capitalize on the hype."
Conveying regulatory sentiments that align with other recent actions that the TSSB has taken in the cryptospace, this latest publication sheds new light on the direction that its Enforcement Division is taking to protect investors in Texas.
"I realize that an investor probably stands little chance of receiving a return of his or her money if our division waits to receive numerous complaints before investigating … suspect offerings," said Rotunda. "Therefore, I've asked our attorneys and investigators to take the initiative to locate and identify fraudulent cryptocurrency offerings before we receive these complaints. We want to work to shut down the illegal schemes before investors are hurt, which we hope will protect the public … while creating an environment where the legitimate firms can operate."
With regard to its mandate to empower and protect Texan investors, the TSSB Enforcement Division will be conducting ongoing investigations, based initially on the cases in this most recent report.