Securities regulator says case highlights potential pitfalls in initial coin offering investments
B.C.’s securities regulator says a Vancouver company violated securities rules when it developed a cryptocurrency under false pretenses and took in $3.3 million from 500 investors in B.C. and beyond.
The B.C. Securities Commission alleges payment processor NetCents and its CEO, Clayton Moore, broke securities rules when they issued a NetCents Coin cryptocurrency in 2017, including by making “misrepresentations” about demand and how the cryptocurrency was to be managed.
“Crypto … still is a hot topic,” said Douglas Muir, the commission’s director of enforcement.
“When you’re offering these sorts of securities to the public, you’ve got to be accurate with your information because investors do rely on it.”
Muir says the commission announced the allegations to highlight the possible risks of
initial coin offerings — fundraising efforts for new cryptocurrencies where investors bankroll the coin — because promised rewards sometimes don’t follow and securities rules are often broken.
None of the allegations against Moore or NetCents have been proven, the commission adds, although possible sanctions include monetary penalties and bans on securities activity or serving as a company director.
CBC News tried to reach NetCents through phone numbers and email addresses listed on the company’s website, social media pages and press releases but received no immediate response.
Allegations of phony non-profit
Muir says in 2018, the BCSC froze the $3.3 million NetCents got from investors.
The commission alleges NetCents Coin was an investment contract and required a prospectus — a formal document with details of the investment — which was never filed.
It further alleges NetCents claimed online that an independent Swiss non-profit issued the coin and would manage transactions using the coin. NetCents claimed the non-profit would hang on to all coin sale proceeds in reserve “for the benefit of all coin holders.”
“However, the BCSC alleges that no independent entity existed for these purposes and could not have done any of the things that NetCents claimed it did,” the commission said in a statement. “Instead, all of the proceeds from sales of NetCents went to NetCents.”
The BCSC also says NetCents made bogus statements about the performance of its coin and company: claiming some coin batches were sold out when it fact they had not yet been offered for sale while also claiming the company was pulling in $100,000 monthly, when it hadn’t even made that much in a year.
“The BCSC alleges that NetCents and [Moore] knew or ought reasonably to have known that the statements … were misrepresentations,” the BCSC said.
The BCSC also says NetCents’ NC Exchange website, where customers could buy and sell the coins, qualified as an exchange but did not follow provincial rules for exchanges.
Muir says an initial hearing about the allegations is scheduled for February, with further hearings likely to take place later in 2024.