In light of the increasing popularity of cryptocurrencies and blockchain technology, a new trend has developed among some small publicly-traded companies in the U.S. In the past few months, several listed companies that have previously had zero ties to the blockchain or digital currencies have announced that they would move into the cryptocurrencies business in one form or another.
These announcements, in turn, caused the share prices of many of these small cap stocks to rally and in some cases more than double - without any substantial evidence that the companies were actually involved in blockchain-related activities. In other words, it appears some companies have chosen to pump their share prices by jumping onto the cryptocurrency bandwagon.
SEC suspends trading in three companies
Needless to say, the U.S. financial regulator, the U.S. Securities and Exchange Commission, is not happy about these developments, with SEC chairman making the following comments at the annual Securities Regulation Institute conference in Washington last month:
“I doubt anyone in this audience thinks it would be acceptable for a public company with no meaningful track record in pursuing the commercialization of distributed ledger or blockchain technology to (1) start to dabble in blockchain activities, (2) change its name to something like "Blockchain-R-Us," and (3) immediately offer securities, without providing adequate disclosure to Main Street investors about those changes and the risks involved. The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering.”
True to its word, the SEC last week announced that it has suspended trading in three listed companies engaged in this sort of behavior. According to an SEC press release, Cherubim Interests Inc. (CHIT), Victura Construction Group Inc. (VICT), and PDX Partners Inc. (PDXP) have received trading suspension orders “amid questions surrounding similar statements they made about the acquisition of cryptocurrency and blockchain technology-related assets.”
The three companies have all been suspended after having claimed to have purchased “AAA-rated assets from a subsidiary of a private equity investor in cryptocurrency and blockchain technology among other things.” CHIT has also announced plans to launch an initial coin offering in the future.According to the SEC, there are open questions about the nature of these company’s’ operations as well as the value of their assets.
Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office, said: “This is a reminder that investors should give heightened scrutiny to penny stock companies that have switched their focus to the latest business trend, such as cryptocurrency, blockchain technology, or initial coin offerings.”
Under U.S. securities law, the SEC is allowed to suspend the trading of a stock for ten days and prohibit broker-dealers from engaging investors to buy or sell the stock until certain regulatory reporting requirements have been met by the company.
The SEC’s press release also highlights its August 2017 warning about investing in publicly-traded companies that announce an ICO or a token sale, which, in turn, could affect its share price.
The iced tea Company that is now a ‘Blockchain’ solutions company
Perhaps the most famous example of a company jumping on the blockchain bandwagon in an attempt to benefit from the hype surrounding this new technology is Long Blockchain (NASDAQ:LBCC), which, until recently, held the name Long Island Iced Tea Company.
In December 2017, the Nasdaq-listed beverage company changed its name to Long Blockchain and subsequently witnessed a 289 percent jump in its share price despite not being able to provide any valid information as to how a beverage company is suddenly involved in the blockchain space.
According to the company, the name change was due to its plans to purchase bitcoin mining equipment to profit from the lucrative cryptocurrency mining market. However, on February 2, 2018, the company announced in a press release that it would not purchase 1,000 Antminer S9 mining rigs and 1,000 APW3++ PSUs as previously announced.
Instead, the company claimed it would be focusing its efforts on a merger with Stater Blockchain Limited, a technology company that is focused on the development of blockchain solutions for the financial markets, as well as exploring further opportunities and investments in the blockchain ecosystem.
Unsurprisingly, Long Blockchain Corp has received a delisting notice from Nasdaq in mid-February in light of the lack of proof that it was actually involved in blockchain or cryptocurrency-related business activities.
The New York-based Nasdaq exchange has the right, under Rule 5101, to delist any company listed on its exchange to "maintain the quality of and public confidence in its market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest."
Nasdaq also stated that it is “revoking its prior notification to the Company that it had regained compliance with the market value of listed securities requirement of Rule 5550(b)(2), also known as the “MVLS Rule”.
Long Blockchain Corp has the right to appeal the delisting, which it has decided to do. Hence, for now, the shares of LBCC will continue to trade on Nasdaq. However, the company will need to go through the appeal procedure as well as adhere to the “MVLS Rule” to prevent a delisting from Nasdaq. That means that LBCC’s market capitalization needs to be above $35 million for ten consecutive days before April 9 to regain compliance or the company will be delisted, according to the Form K-8 that LBCC submitted to the SEC.
The struggling beverage company’s move to rebrand itself as a blockchain company seems very much like an attempt to prevent a delisting of its securities from Nasdaq, rather than an actual interest in revamping the company to become an active player in the blockchain industry.
SEC crackdown no idle threat
The suspension of trading in Cherubim Interests, Victura Construction Group, and PDX Partners stocks, in light of unsubstantiated claims to be involved in cryptocurrency-related business, shows the SEC wasn’t blowing hot air when it warned it would crack down on “fake” blockchain companies to protect investors.
Whether these actions will prevent further listed small cap companies from jumping onto the blockchain bandwagon for the purpose of pumping up their share prices, however, remains to be seen.