The US Securities and Exchange Commission (SEC) has fined Coinme, a cryptocurrency exchange, nearly $4 million for allegedly offering unregistered securities and making “misleading statements” about its crypto token, UpToken. Coinme, its subsidiary Up Global SEZC, and its CEO, Neil Bergquist, were charged by the SEC on April 28, with Up Global agreeing to pay a $3.52 million penalty, for which Coinme was also held liable. The SEC alleged that Coinme’s Initial Coin Offering (ICO) of UpToken between October and December 2017 was an investment contract under the Howey test and was an unregistered securities offering. The ICO raised around $3.6 million to expand Coinme’s fleet of Bitcoin ATMs, with the funds used to add 30 ATMs, and UP holders received benefits such as discounted fees and cashback 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 instead of its own ATMs. Coinme shut down all of its ATMs by July 2019, and there is currently no use for UpToken, with its market cap falling to around $50,000 and 24-hour trading volumes topping just over $180.
Coinme was found to have offered unregistered securities, and the SEC handed down fines totalling almost $4 million to the company, its subsidiary Up Global SEZC, and the CEO of both firms, Neil Bergquist. The SEC found that Coinme’s ICO of UpToken between October and December 2017 was an unregistered securities offering, and the ICO was considered an investment contract under the Howey test. Coinme raised approximately $3.6 million through the ICO to expand its fleet of Bitcoin ATMs, adding 30 ATMs with ICO funding. UP holders received discounted fees and 1% cashback in UP when using the ATMs. However, in January 2019, Coinme changed its offering, partnering with Coinstar to use its cash-counting kiosks for cash-to-crypto transactions instead of its own ATMs. Coinme shut down all of its ATMs by July 2019, rendering UpToken unusable. The SEC also found that Bergquist and Up Global made false and misleading statements about the demand for UpToken and the amount raised in the ICO.
The SEC’s action against Coinme underscores the agency’s increased scrutiny of the cryptocurrency market, particularly with regard to ICOs and the sale of unregistered securities. The SEC has warned repeatedly that ICOs are subject to federal securities laws, and that any token offered or sold in an ICO must be registered or qualify for an exemption from registration. Failure to comply with these laws can result in enforcement action, as demonstrated in the case of Coinme.
Coinme’s ICO of UpToken highlights the risks associated with investing in ICOs, particularly those that are not registered with the SEC. Investors should conduct thorough due diligence and carefully review the offering materials before investing in any ICO. The case also highlights the importance of transparency and accurate disclosure in the cryptocurrency market, with companies facing enforcement action if they make false or misleading statements.