SEC Targeting Public Companies with Ties to ICOs ( SEC being Played by Short Market Makers)
- SEC Investor Bulletin Causes Stir
- STBV and CIAU Likely Suspended for Administrative Reasons
- Market Makers Using SEC to Profit off of Actions
After the SEC Investor Bulletin regarding ICO’s on July 25, 2017 two publically traded OTC stocks were temporarily suspended and thrust into the spotlight. In their bulletin they made the argument that if tokens are offered for sale and then can be resold on another virtual currency exchange or platform they may in fact be a security and subject to federal security laws. It’s pretty clear from this point forward that the SEC is intent on regulating ICO’s.
When Strategic Global Investments, Inc. (OTCMKTS:STBV) and CIAO Group (CIAU) started releasing details about their plans to pursue an ICO the stock market action was very favorable. CIAU was trading at .05 before the announcement to pursue blockchain technology and over the course of 40 days hit a high of .50 before coming back down to .05 at the time of the suspension. STBV which announced the swap of $50 million in Troptions cryptocurrency for public company stock was trading at .01 and flew to .14 in a matter of 4 days and was suspended after it retraced a little on day 5.
When STBV and CIAU got their suspension notices this could have been the SEC’s attempt at a shot across the bow to any companies looking to get into this space and circumvent the regulator process. The other rationale can be seen when you connect the dots and follow the money and look who had the most to gain. At first glance these announcements seemed well received by investors so it’s hard to see the logic behind the suspension. However, when you look deeper into the SEC ‘s order you will see their focus was about the company maintaining current information. Management had plenty of disclaimers regarding the ICO’s and plans to be current. One company STBV actually stated that they would only be doing SEC compliant ICO’s. Since the halt, STBV has still been trading on the Decentralized exchange know as the DEX. The SEC is trying to “protect” investors but it seems like they are interfering with free market forces for price discovery.
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Strategic Global Investments (STBV) was the SEC’s first target after their landmark announcement that they would now be overseeing Initial Coin Offerings (ICO’s). On August 3rd, 2017 the SEC suspended trading in STBV effective August 4th, 2017. The SEC cited reasons as “among other things, the activities of the company with respect to Initial Coin Offering or ICO’s” If you read the SEC order the first item mentions the “accuracy of the assertions by STBV” which likely refers to their press releases and then they talk about the “purported” location of the company and finally mentions the “activities of the company with respect to Initial Coin Offerings or ICOs.” It’s highly irregular for the SEC to simply suspend a company for assertions that they made, so the SEC needed some legal enforcement basis and was forced to use the cover of the ICO’s in the order. It is apparent in the order that the only thing the SEC seemed focused on was making sure the company is compliant.
Ciao Group was the next target of the SEC. On Aug 9 the SEC order a trading halt of CIAU shares effective August 10th, 2017 for 2 weeks. The SEC suspension was due to “questions regarding the accuracy of assertions by CIAU in press release to investors concerning, among other things, the activities of the company with respect to business plans in the telecommunications industry and plans for an Initial Coin Offering or ICO.” Here again, the SEC is interested in its telecommunication business plans but used ICO regulation as legal cover. The interesting thing is that CIAU didn’t become a target until they used the ICO verbiage in their press release.
The issue that investors need to consider, is the overreach of the SEC into the free markets and essentially how exogenous forces are using the SEC to their own personal benefit. In both instances the SEC use the halt for public interests and concern. This implies that the spike in volume and complaints resulted in SEC intervention in the “public interest”, but the only interested party complaining about a stock going up 5 days in a row would be a short market maker. In both instances the SEC seemed to be pawns manipulated by these short market makers who used negative promotional activity in conjunction with social media to beat down stock price and cause fear and doubt in investor’s minds. When market makers were unable to keep pressure on the price they were able to manipulate the “Administrative Arm” to spread fear and doubt in investor’s minds. On otcshortreport.com close to 21 million shares were shorted on STBV just a hair short of half the float. In both instances the SEC had little reason to believe the companies made fraudulent representation because disclaimers were attached to all press releases.
There have been 55 administrative suspensions in trading this year but this doesn’t include a mass suspension on June 23, 2017 of 42 companies. The mass suspension was part of the SEC’s effort to clear out companies that do not have any operations or business nexus. If you dissect these suspensions there are some common themes and lessons learned. In the past two months almost all the suspensions had similar characteristics. Suspended companies had revoked or defaulted state registrations, had no control person, did not supply current information, had conflicting corporate addresses, and most importantly ignored SEC communication. The concept of having the power of suspension is a good one, in that the SEC can wield this lever to get companies to comply with mandated reporting requirements. They can also use this power to go after suspect activity however they may have crossed the line with these ICO companies because these companies were clearly operating and putting out required disclosures and were reachable via phone or email.
The real question on investor’s minds is will these stocks ever trade again and in almost all the cases the answer is no but there are a few exceptions to look at in the past couple months. The companies that resumed trading communicated with the SEC. If a company doesn’t communicate then they won’t know what is needed to get back into compliance. Some of the companies suspended had very volatile trading before the suspension and were involved in power struggles, lawsuits, and promotional activity. The symbols of the companies that resumed trading are PGPM, EPTI, CCRE, and AIOM to name a few.
Based on the public rebuttals to the SEC suspension both companies have reached out the SEC and plan on complying. It’s reasonable to expect both companies to resume trading however STBV management seemed to be further along in the process of having transmitted some current information on the day of the suspension. Unlike STBV there is no current marketplace for CIAU to trade to gauge investor reaction. One of the more popular outlets for stock chatter is Investors Hub. In the respective message boards proxies of the market makers are posting negative information in both forums. There seems to be a core of people trying to monopolize the chat board. Discussion seems to be centered around how the stocks will never trade again. This concept is counter intuitive because if they really believed the stock was never to trade again why would they be trying so hard to convince a holder to sell something they didn’t believe they could ever sell.
It appears both of these companies were targeted by shorts on the Investors Hub message board that were racking up large financial losses. With the non-stop banter back and forth on the message boards insinuating that the CEO was in jail and not responding to SEC allegation it will be very interesting to see how STBV stock will open for trading on Friday. On the DEX the stock is trading at .016 XCP which is equivalent to .19 almost double the closing price on August 3,2017 before the halt went into effect. Over 90% of the time a trading suspension works out favorably for the shorts but this time might be the exception than the rule. Once STBV reopens for trading this might be an indicator on how CIAU will perform.
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Disclosure: We hold no position in $STBV or $CIAU, either long or short, and we have not been compensated for this article.