The US Securities and Exchange Commission (SEC) has imposed fines of nearly $4 million on crypto exchange Coinme for allegedly offering unregistered securities and making misleading statements about its crypto token UpToken (UP).
According to the SEC, Coinme, its subsidiary Up Global SEZC, and the CEO of both firms, Neil Bergquist, settled charges related to an Initial Coin Offering (ICO) of UP conducted between October to December 2017. The SEC alleged that the ICO was an investment contract under the Howey test and was an unregistered securities offering.
Coinme fined for violating securities laws
The ICO raised around $3.6 million to expand Coinme’s Bitcoin ATMs fleet, with 30 ATMs added using ICO funding. Holders of the token received rewards like reduced fees and cashback paid in the native anytime they use the ATM.
Fast forward to January 2019, Coinme changed its offering after partnering with Coinstar to use its cash-counting kiosks to carry out the transactions rather than its ATMs. By July 2019, Coinme shut down all of its ATMs. Since then, there has been no use for UpToken, with its market cap falling to around $50,000 and 24-hour trading volumes topping just over $180.
The SEC also discovered that Coinme and Up Global made fake statements about the demand for the token and the amount they made after the offering. The firm claimed that the exchange purchasing of its token to fund its program would bring in demand.
However, the SEC claimed that Bergquist and Up Global took steps before and during the ICO to push for a token supply that would reduce Coinme’s need to purchase the token after the ICO for the ATM rewards program.
The SEC also claimed that Coinme sent 160 BTC, worth over $1 million at the time, to an Up Global wallet used to receive funds in the ICO. Up Global sent back around 14.5 million UP at a discount to Coinme, and the transaction created the impression that a third party made a large purchase.
Additionally, 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.
The parties involved have agreed to pay the penalties
Bergquist settled the charges and agreed to pay a penalty of $150,000 and be barred from acting as an executive of a public company for three years.
Up Global agreed to pay a penalty of $3.52 million, for which Coinme was also liable. Coinme agreed to pay a penalty of $250,000. Coinme has not released any public comment on the matter.
The SEC has warned investors about the risks of investing in cryptocurrencies, particularly those that are not registered with the regulator and has taken action against numerous companies for violating securities laws. As the cryptocurrency market continues to grow, investors should exercise caution and conduct thorough research before investing in any digital asset.