The Securities and Exchange Commission (SEC) sued the NAC Foundation and Rowland Marcus Andrade in the Northern District of California on Thursday for securities violations, claiming the defendants misled consumers with the unregistered sale of securities that defendants claimed to be an improved version of bitcoin, but did not live up to these promised improvements.
The NAC Foundation “was in early-stage development of a blockchain-based digital token called AML BitCoin, which NAC claimed was superior to the original bitcoin because it had purported anti-money laundering, know-your-customer, and other security features encoded in the smart contracts for the token.” It also claimed to be compliant with cryptocurrency regulatory requirements, but was not, according to the SEC.
The SEC alleged that “while the proprietary anti-money laundering, know-your-customer, and other security features of AML BitCoin had already been developed, certain additional features of the token and NAC’s ‘privately regulated public blockchain’ were still being completed. As a result, NAC stated that it would initially issue tokens with the symbol ABTC (‘ABTC tokens’) that could eventually be exchanged one-for-one for functional AML BitCoin tokens.” The ABTC tokens were available in May 2018 on third-party platforms. However, “[a]t no time did the ABTC tokens have any use” because “NAC did not have a platform where the ABTC tokens could be used to purchase goods or services or transact any business, they could only be exchanged for other digital assets or fiat currencies on certain third-party digital asset trading platforms.”
The defendants raised at least $5.6 million from 2,400 investors from the sale of these allegedly unregistered securities between at least August 2017 and December 2018. “ABTC tokens could be purchased…at prices ranging from $0.35 to $0.45 per token in the pre-sale phase of the offering prior to the ICO phase, then at prices ranging from $1.00 to $1.50 per token in the ICO and after.” The SEC stated that the tokens NAC offered, including its public initial coin offering (ICO), constituted a security under federal law.
The tokens were also marketed in a way that made them seem tradeable and that they would appreciate in value. NAC and Andrade also deceived customers through their promotion materials, and they made it seem like “they were on the verge of airing a Super Bowl commercial for AML BitCoin that they falsely claimed was rejected.” The defendants allegedly made false statements about NAC’s business to investors, including the development of the AML BitCoin tokens and the company’s finances. NAC portrayed to investors that its technology was better than the original bitcoin, but this and the other statements were allegedly materially false. Specifically, “NAC had not developed any of the claimed features of the AML BitCoin tokens and that NAC only had introductory meetings with government agencies,” none of which led to the government’s use of these tokens.
Additionally, the SEC claims that defendant Andrade “took steps to manipulate the market for ABTC tokens and artificially increase the trading volume and value of the ABTC tokens on digital asset trading platforms.” Further, Andrade allegedly misappropriated $1.1 million of the offerings for his own use, including to buy two properties one for him and one for his father and two buy two vehicles.
The SEC asserts that since NAC’s token is a security, it was required to register the security with the Commission, to ensure “full and fair disclosure…to the investing public to provide sufficient, accurate information to allow investors to make informed decisions before they invest.” This requires disclosing financial and management information about the issuer, terms for the securities offering, the proposed use of the investment funds, and an analysis of risks and trends. However, defendants did not provide the SEC with this required information, nor did they obtain an exemption; the SEC adds that defendants are not eligible for an exemption. As a result, the NAC failed to disclose this information to investors.
The defendants are accused of violating the Securities Exchange Act of 1934 and Rule 10b-5 through the sale of their unregistered securities and for their misrepresentations or false statements and allegedly fraudulent activities. They also violated the Securities Act of 1933 because of their alleged sale of unregistered securities, false statements, and unlawful conduct.
The SEC has sought to permanently enjoin defendants from further violating these Acts; to prevent them from “participating in the issuance, purchase, offer, or sale of any securities”; for defendants to disgorge all unjust enrichment or ill-gotten gains from their conduct; for defendants to pay a civil penalty; to prevent defendant Andrade from serving as an officer or director of any entity that has registered securities with the SEC; to retain jurisdiction of this action to enforce the entered orders and judgment; and other relief as determined by the court.