On April 28th, the Securities and Exchange Commission (SEC) announced that it had settled charges against Coinme, a cryptocurrency exchange, for allegedly offering unregistered securities and making false statements about its crypto token UpToken (UP). The SEC imposed almost $4 million in fines on Coinme for these violations. Coinme’s subsidiary, Up Global SEZC, and its CEO, Neil Bergquist, were also involved in the charges. Up Global settled for a penalty of $3.52 million, and separate penalties of $250,000 and $150,000 were also imposed on Coinme and Bergquist, respectively.
The SEC alleged that Coinme, Up Global, and Bergquist’s Initial Coin Offering (ICO) of UP between October to December 2017 was an investment contract that constituted an unregistered securities offering. The ICO raised around $3.6 million to increase the number of Bitcoin ATMs in Coinme’s fleet. With the ICO funding, Coinme added 30 ATMs, and UP holders received benefits, such as discounted fees and a 1% cashback paid in UP when using the ATMs. However, in January 2019, Coinme changed its offering and partnered with Coinstar to use its cash-counting kiosks to facilitate cash-to-crypto transactions rather than its own ATMs, and by July 2019, Coinme shut down all its ATMs. Moreover, due to the lack of demand for UpToken, its market value decreased significantly, dropping to around $50,000 with 24-hour trading volumes of only $180.
The SEC also accused Bergquist and Up Global of making false and misleading statements about the demand for UpToken and the amount raised in the offering. Up Global claimed that Coinme’s purchasing of UP to fund its ATM rewards program would create constant demand for the token. Still, according to the SEC, “Bergquist and Up Global took steps before and throughout the ICO to obtain an UpToken supply that would substantially reduce Coinme’s need to purchase UpToken after the ICO for the ATM rewards program.”
The SEC claimed that Coinme sent 160 BTC, worth over $1 million at the time, to an Up Global wallet used to receive investor funds in the ICO. Up Global sent back around 14.5 million UP at a discount to Coinme. The transaction “knowingly or recklessly” created the impression that a third party made a large purchase. In another example, it was claimed that Bergquist negotiated a 500 Bitcoin round-trip transaction of UP tokens with an unnamed Hong Kong company, with Coinme borrowing the funds to purchase further UP at a discount. The transaction was also used to create an impression of demand for the tokens.
Bergquist did not admit or deny the SEC’s findings, agreed to settle the charges, and was barred from acting as an executive of a public company for three years.
Coinme’s alleged violations of securities law and false statements about UpToken highlight the potential risks and pitfalls of investing in cryptocurrencies that are not registered as securities. Such investments may lack sufficient regulatory oversight and could result in losses or legal consequences for investors. Cryptocurrency exchanges, like Coinme, need to comply with securities laws and provide accurate, transparent information to protect investors and the integrity of the financial system.