Texas securities regulator issues cease and desist order against BitConnect

Maria Nikolova

The Securities Commissioner found that the BitConnect investments are securities, but were not registered as required by the law.

UK-based cryptocurrency firm BitConnect was dealt a blow by a Texas securities regulator on Thursday, as the Texas Securities Commissioner issued an Emergency Cease and Desist Order to halt the investment programs operated by the company.

The order entered on January 4, 2018, by Securities Commissioner Travis J. Iles explains that BitConnect is soliciting investors for cryptocurrency-based programs that the company claims will deliver annualized returns exceeding 100% or more.

BitConnect issues its own currency, called BitConnect Coins. The company claims it has placed 9.4 million of the coins into the online cryptocurrency marketplace, representing a market value of $4.1 billion as of January 3, 2018. The company has said it will issue a maximum of 28 million coins.

The company requires individuals to use Bitcoin to invest in various BitConnect programs. In one investment scheme, called the BitConnect Lending Program, investors purchase BitConnect Coins, which are provided to a “BitConnect Trading Bot” to generate returns purported to reach 40% a month.

The Securities Commissioner found that the BitConnect investments are securities, but were not registered as required by the Texas Securities Act and State Securities Board Rules and Regulations. Moreover, the company is not registered to sell securities in Texas.

BitConnect has disclosed virtually nothing about its principals, financial condition, or strategies for earning profits for investors. It has not provided a physical address in England. Despite providing no information on how it will make money for investors – including the algorithms behind the Trading Bot – BitConnect is claiming its investments are a “safe way to earn a high rate of return.”

The company operates websites and deploys online advertising to recruit sales agents, which it calls “affiliates.” It provides marketing material to affiliates, including online presentations, and pays them commissions for referrals that result in investments in BitConnect programs. Sales agents for BitConnect are targeting Texas residents, as well as residents of other states, through websites, social media, and online marketplaces. These sales agents are not registered as agents of BitConnect to sell securities in Texas.

The regulator reminds the public that this is not the first action in Texas targeting cryptocurrency firms. Thus, on December 20, 2017, the Securities Commissioner entered an Emergency Cease and Desist Order against USI-Tech Limited, a Dubai-based firm selling investments tied to Bitcoin mining.

The watchdog warns that investing in cryptocurrencies carries significant risk because of regulatory and legal actions, competition from other cryptocurrencies, and the extreme volatility in the price of many cryptocurrencies.

The Securities Commissioner’s action is taken shortly after BitConnect announced that it would hold an Initial Coin Offering (ICO) in the United States on January 9, 2018.

Under state law, BitConnect can contest the order at the State Office of Administrative Hearings.

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