SEC Cracks Down On “Overnight Blockchain” Companies

One month after the addition of “blockchain” to a company’s name – or business model – became a joke  in financial circles, not to mention a shortcut to soaring market cap for countless micro-cap companies, the SEC is finally getting involved.

As Reuters reports, the SEC is scrutinizing public companies that change their name or business model overnight in a bid to capitalize upon the hype surrounding blockchain technology, SEC Chairman Jay Clayton said on Monday. As we discussed last month, dozens of little-known companies – and not so little-known  in the case of Kodak and its infamous KodakCoin – across the globe saw their share prices surge higher in recent months after unveiling plans to enter the bitcoin industry or that of its underlying distributed ledger blockchain technology.

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The topic of “blockchain” renaming euphoria was a prominent topic in the latest investor letter from Upslope Capital Management in which George Livadas wrote the following:

If most investors are indeed “all-in,” we’d expect to see signs of reaching for returns and questionable risk-taking behavior. That’s exactly what we are starting to see, in my view. If there is an “obvious” bubble, it’s Bitcoin and all things blockchain-related. The phenomenon seems to be bleeding into equity markets, where almost every week, another stock jumps on reports of (often highly questionable) involvement in Bitcoin, blockchain, etc.

“I know this idea is crazy – but it’s going to get crazier!” is an oftenmentioned investment thesis here. The mood was captured perfectly in a January 2nd CNBC headline that read: “Tiny company [that] owns some Hooter’s restaurants says it will use blockchain for rewards program, boosting stock by 50%.” Lest you think this was an isolated incident, note the eye-popping returns (over just 60 days) for the stocks listed below. Many of these companies pulled off similar gimmicks.

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And now it is the SEC’s turn, although to be fair, the SEC already got involved back in December, when the regulator suspended trading in the shares of Crypto Company, a small firm that saw its stock rise more than 2,700 percent after signing a deal to buy a cryptocurrency data platform.

Addressing the trader euphoria in this small corner of the market, Clayton warned that “it was not acceptable for companies without a meaningful track record in the sector to dabble in blockchain technology, change their name and immediately offer investors securities without providing adequate disclosures around the risks involved.” Although in light of the recent performance gains one doubts whether a 100 page powerpoint presentation of risk factors would do anything to dent the mania as long as the overall momentum was higher.

The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering”, the SEC chair said at a conference on Monday.

Clayton also said the SEC had seen “disturbing” evidence that legal professionals have been wrongly counseling clients that initial coin offerings do not need to comply with federal securities law. Previously, the SEC has said that such fundraisings should comply with securities law and has warned investors more broadly over the risks of cryptocurrency fraudsters.

“I have instructed the SEC staff to be on high alert for approaches to ICOs that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar,” Clayton said.

Today’s crackdown on “blockchain” companies comes just days after the SEC effectively blocked the path for any bitcoin-based ETFs, warning that they are far too risky for the general public, which should instead invest its money in the stock market which is currently in its “blow off top” meltup phase, and trading at Shiller PE of over 34x, roughly 4 turns higher than where it was just before the Great Depression…

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