On August 29th 2019, the U.S. Securities and Exchange Commission (SEC) announced a settlement with Bitqyck and its founders. The settlement stems from charges by the SEC which include fraud, false promises to investors, personal expenses of over half a million dollars paid directly by investor funds, and unregistered securities offerings.

Bitqyck and the SEC’s Settlement Explained

The SEC alleges that Bitqyck Inc. and its founders— Bruce Bise and Sam Mendez— defrauded investors, operated an unregistered securities exchange, and raised over $13 million in an unregistered securities offering.

Per the SEC’s complaint, Bitqyick promoted two digital tokens, Bitqy and BitqyM from December 2016 to February 2019. The tokens were promoted to prospective investors in 45 U.S. states, two U.S. territories, and 20 countries, through what the SEC calls “multiple, fraudulent unregistered digital asset securities offerings”.

Ultimately, Bitqyck created and sold its tokens to more than 13,000 investors. But the SEC continues that Bitqyck defrauded investors on multiple accounts.

First, the SEC says the defendants told investors they would “automatically receive one-tenth of one share of Bitqyck common stock through the operation of a smart-contract associated with the token”. Yet, according to the SEC, no ‘smart-contract’ ever existed. In fact, they say no equity or ownership in any form was ever transferred.

Second, both defendants allegedly racked up over half a million dollars in ‘personal expenses’, which were paid for directly by investor funds.

According to the SEC’s complaint,

“Bise and Mendez controlled Bitqyck’s bank accounts and funds, paid themselves distributions from the Bitqyck bank accounts funded exclusively with investor funds, and used those accounts to pay for their own personal expenses. Between personal distributions and payments for personal expenses, Bise received at least approximately $684,092 and Mendez received approximately $644,821 in ill-gotten gains. Defendants paid $4.5 million as sales commissions to investors who referred new investors to Bitqyck. Collectively, investors lost more than two-thirds of their investments.”

In the end, Bitqyck and its founders reached a settlement with the SEC— without admitting to or denying the allegations.

Bitqyck consented to a court order agreeing to pay disgorgement, prejudgment interest, as well as a civil penalty of over $8.3 million. Mendez and Bise must each pay disgorgement, prejudgment interest, and civil penalties of $850,022 and $890,254 respectively.

What It Means: The SEC’s Increased Action in the Crypto Space

The SEC has increasingly entered the cryptocurrency realm, taking action against fraudulent and unregistered ICOs, exchanges, and even custody solutions.

In fact, SEC Chairman Jay Clayton has publicly stated that nearly every ICO he has seen— minus Ethereum— constitutes a securities offering.

One consequence has been the abandonment of the ICO, and a turn to the Security Token Offering (STO) as a viable alternative.

Security tokens are also anticipated to transform the traditional financial securities industry, which has a global value of approximately $544 trillion.

The reasoning is straightforward: security tokens leverage Distributed Ledger Technology (DLT) to algorithmically enforce their jurisdiction-appropriate laws and regulations. In this sense, a major difference between the ICO and the STO is regulatory compliance.

What do you think about the shift from ICO to STO due to regulatory enforcement? Will STOs live up to their hype? Let us know what you think in the comments section below.

Image courtesy of the SEC.