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Man Who Issued Securities For Bitcoins Settles With SEC

Soulskill posted about 2 months ago | from the if-it's-not-money,-it's-close-enough-for-government-work dept.

Bitcoin 56

MrBingoBoingo writes with news that the U.S. Securities and Exchange Commission has settled federal civil charges with Erik Voorhees, a man who sold shares of two businesses in exchange for Bitcoins without registering them. Voorhees must make restitution for the $15,000 in profit he made, plus interest, and a $35,000 fine. Here's the SEC's filing (PDF). "The agreement reflects an expanded effort by U.S. regulators to cast a wider net over the burgeoning bitcoin economy. It comes as investor enthusiasm grows for direct offerings of shares by new bitcoin-focused ventures over bitcoin's global computer network. Maidsafe, a system for sharing computer memory, raised $7 million last month in such a deal."

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the empire strikes back... (1, Insightful)

harvey the nerd (582806) | about 2 months ago | (#47162355)

...we all know that issuers of fiat money and securities are not going to take bitcoin et al lying down. Ditto the tax man.

The what strikes where now? (5, Informative)

Anonymous Coward | about 2 months ago | (#47162367)

The dude broke the law. A very real, very good (shockingly) law.

Doesn't matter if he offered securities for bitcoin, bushels of corn, or steamy massages. The currency isn't the problem with what he did.

Re:The what strikes where now? (3, Insightful)

SuricouRaven (1897204) | about 2 months ago | (#47162441)

The only issue that involves bitcoin specifically is enforcement. If he hadn't been so public, the crime could have gone unnoticed - there are no reporting requirements. If you move more than $10,000 or so in a conventional bank, it'll set off alarms and someone will come to see what is going on.

Re:The what strikes where now? (1)

Anonymous Coward | about 2 months ago | (#47163229)

" If you move more than $10,000 or so in a conventional bank, it'll set off alarms"

Here in Canada it is $5000.

Re:The what strikes where now? (0)

Anonymous Coward | about 2 months ago | (#47162533)

I checked, but can't find any countries which have steamy massages as the fiat currency. This is deplorable! Someone should raise this issue urgently with the Sealand government.

Re:The what strikes where now? (0)

Anonymous Coward | about 2 months ago | (#47163137)

lol; sealand couldn't handle the immigration.

Re:The what strikes where now? (3, Insightful)

IamTheRealMike (537420) | about 2 months ago | (#47163501)

The dude broke the law. A very real, very good (shockingly) law.

Is it good?

I don't think there's any problem with governments competing against ratings agencies: I think 2008 showed pretty conclusively that the existing private sector organisations kind of suck at protecting people from risk. But the SEC isn't just an organisation that gives a stamp of approval to well run investment schemes. They actively stamp out any that don't register with them and report to them. That makes the entire economy very vulnerable to poor decision making by a mere handful of people. It also can seriously hinder innovation: look at the glacial speed of progress towards the oh so ambitious goal of "not killing crowdfunding sites". You'd think not doing something would be easier, wouldn't you, but it's taking years and an 800+ page report.

If the SEC lost their enforcement powers and just acted as a place where reputable, respectable fundraisers wanted to go it'd be pretty unobjectionable and there'd be natural flex in the system if they started making bad decisions. They'd give Moody's a run for their money. But it's not like that. They probably stopped some scams by virtue of the threat of their enforcement actions, it's hard to know how many, but they probably also stopped a lot of legitimate and non-scam investments too. The cost/benefit ratio of securities laws is rather hard to know.

Re:The what strikes where now? (3, Insightful)

Archangel Michael (180766) | about 2 months ago | (#47164261)

I would go a step further, in that the SEC was completely complacent in the whole Banking Investment fraud that led up to the collapse of the economy. They failed, completely, to understand the "new" derivative investments and thus the problems associated with compounded leveraging, that they of all people should have recognized.

IMHO when a organization, which has one task, fails to manage in their duties in such a complete way as this, the whole thing needs scrapped. Caveat Emptor is heartless, but it is heartless at both ends. However if you break the law, you should go to jail. Too bad our elected officials were in on the scam and thus nobody is going to jail for the theft and fraud that was perpetrated on our country (and the world)

Congress underfunds the SEC (1)

sjbe (173966) | about 2 months ago | (#47166389)

I would go a step further, in that the SEC was completely complacent in the whole Banking Investment fraud that led up to the collapse of the economy.

If you want to blame anyone, blame Congress. The SEC is badly underfunded [fool.com] and that is entirely the fault of Congress. I won't get into the politics of why but you can probably guess the various political motives involved. The SEC simply doesn't have the funding or the manpower to oversee what they've been charged with managing adequately.

Re:Congress underfunds the SEC (1)

Archangel Michael (180766) | about 2 months ago | (#47180719)

If you want to blame congress, then blame the people who keep electing the same two corrupt parties (that would be "we the people") We get what we deserve. I don't trust the government, because I don't trust the people voting for government. I trust myself to do what is right for me and mine, and I'm willing to accept that risk.

The SEC isn't underfunded, it cannot perform its basic duties at any funding level, simply because the rest of the system doesn't want it to. And since we the people keep voting for the same corrupt system, we get what we deserve. Which is why I am a Libertarian.

Re:The what strikes where now? (1)

lgw (121541) | about 2 months ago | (#47165665)

That's libertarian fantasy not grounded in history. The SEC has not arrogated itself powers at random: no one like giving the government regulator power more than the sort of people who own stock and commodity exchanges, and those people have quite significant political power. SEC rules, just like exchange rules, have grown over time in response to a long history of very real disasters, abuses, and scandals.

While the combination of exchange rules and SEC rules might be slightly larger than the minimum viable set of rules needed for a functional free market, it's damn close. More to the point, these rules satisfy people with lifelong careers running the most successful free markets the world has ever seen. Ideas that "sure sound good to me and my smart friends" are in this area are right up there with every Youtube video about how Einstein or Quantum Mechanics is wrong.

The isn't macroeconomics, where everyone is guessing, this is the finance equivalent of engineering.

Re:The what strikes where now? (1)

Darinbob (1142669) | about 2 months ago | (#47166415)

Although the SEC has problems because it's not truly independent in its thinking. It is full of people from the very industry it is regulating, which causes it to have the same blind spots as the industry (ie, showing no concern over mortgage derivatives). A good regulatory body should be full of skeptics and doubters.

Re:The what strikes where now? (1)

lgw (121541) | about 2 months ago | (#47166557)

Well, the SEC has a very specific issue of being thoroughly corrupted by Goldman Sachs, there's no doubt of that. But it doesn't have a problem with over-regulating markets.

The financial exchanges actually went to the SEC asking for mortgage derivatives to be exchange-traded. That would have avoided the problem (not the real estate bubble, but the massive affect it had on investment banks), and everyone not in the pocket of those few banks understood the need and its magnitude. Sigh.

Re:The what strikes where now? (0)

Anonymous Coward | about 2 months ago | (#47167113)

It would probably have helped if the CMOs were exchange-traded. But that would not have fixed the problem that those securities had facetious ratings supplied by ratings firms with a clear conflict of interest. Their ratings 'products' are subordinate to the activities of their consulting wings. Ergo, you got a bunch of dreck rated AAA. Institutions that depended on rating agency ratings were in deep doodoo because of bogus ratings.

Re:The what strikes where now? (1)

lgw (121541) | about 2 months ago | (#47167429)

Because they weren't exchange-traded, there were 1000s of different contracts with different terms. No one of them got much attention from analysts. Had there been just a handful of contracts instead, the standardized terms would have led to far deeper analysis. Yes, all ratings agencies have their issues, but they do tend to work well in aggregate for non-government securities.

You don't want financial "innovation" (1)

sjbe (173966) | about 2 months ago | (#47166235)

SEC isn't just an organisation that gives a stamp of approval to well run investment schemes. They actively stamp out any that don't register with them and report to them. That makes the entire economy very vulnerable to poor decision making by a mere handful of people.

No, what it does is help keep crooks from putting forth "investments" that really are just frauds. It's the same reason we require drugs to get FDA approval before being sold to the public.

It also can seriously hinder innovation

You REALLY don't want fast paced financial "innovation". That was a huge part of how we got into the big recession in 2008-9. A lot of "financial innovation" is really fraud with a clever name.

If the SEC lost their enforcement powers

The SEC has their enforcement power for some extremely good reasons. There needs to be a cop on the beat.

Re:You don't want financial "innovation" (2)

Darinbob (1142669) | about 2 months ago | (#47166469)

Basically most of the economy is about person A selling something to person B. Many of the financial "innovations" involve ways for person C to get a piece of that transaction.

Re:The what strikes where now? (1)

ultranova (717540) | about 2 months ago | (#47166775)

It also can seriously hinder innovation: look at the glacial speed of progress towards the oh so ambitious goal of "not killing crowdfunding sites".

Is the purpose of a crowdfunding site to fund a project or separate fools from their money? If it's the former, what's stopping someone from putting up another that does the latter? Given that the author of a project might simply hide the money and run rather than spend it on the project, what constitues due diligence on the part of the site to release them from responsibility? Perhaps "buyer beware", in which case won't the idea just die under the onslaught of scammers?

Yes, the goal of "not killing crowdfunding sites" is actually pretty ambitious. The regulation surrounding investment schemes is pretty much spam filter for the financial world, only the amounts of money involved are much higher.

Re:The what strikes where now? (1)

jklovanc (1603149) | about 2 months ago | (#47167355)

If the SEC lost their enforcement powers

They could no longer enforce the rules and companies could do anything they wanted. Do you really see a good outcome there?
The SEC is not there to directly protect people from risk. It is about information and rules. Without the SEC the following things can happen.
1. This year we don't want to have a AGM. (We want to stay in power. We have your money what do we care what you think?)
2. This year we won't produce an annual report. (Profits are down and we don't want investors to see that).
3. Those voting shares you bought are now non-voting shares.
4. Those 2 million shares that you thought bought 51% of the company? I forgot to tell you about the 4 million shares I just created and gave to myself.
5. Insider trading? What's that? He's my friend and I will tell him anything I want.
6. Lets sell the company for half the share price. (Lets not mention the millions the other company is giving the board)
7. Lets force our stock price down so we board members can do puts and make some cash.
Without equity shares being strongly regulated many bad things can happen. Without the shares being registered the SEC can not regulate them.

Crowd funding sites are completely different than securities transactions. With crowd funding you are purchasing something (sometimes that something is just a good feeling) and once the crowd funding campaign is over you have no financial relationship with the company. With a security transaction you are purchasing part of the equity in the company. The value of this equity can go up and down depending on what the company does. It is a long term investment where the actual value is only realized when the securities are sold. A lot can happen between the time of purchase and the time of sale and it is very important that the SEC is there to make sure everything is above board.

Re:The what strikes where now? (0)

Anonymous Coward | about 2 months ago | (#47167343)

From TFA it doesn't look like any laws were broken, and even the American tax idiots deny that BitCoin is a currency. America is absolutely fuckered right now and trying to take every productive citizen down just in case they wake up and ditch this sinking ship.

Re:the empire strikes back... (3, Interesting)

jythie (914043) | about 2 months ago | (#47162809)

So.... equal treatment is 'not taking it lying down'? That is less like striking back and more like official recognition with all the rights and responsibilities that affords.

His brother Jason, though... (1)

Anonymous Coward | about 2 months ago | (#47162359)

Don't try to run from his brother.

Re:His brother Jason, though... (2)

the_humeister (922869) | about 2 months ago | (#47162375)

You don't have to run fast, just faster than the other guy.

Re:His brother Jason, though... (1)

The Grim Reefer (1162755) | about 2 months ago | (#47162995)

You don't have to run fast, just faster than the other guy.

But unlike a lion, Jason doesn't usually stop at just one.

Routine unregistered securities case (5, Informative)

Animats (122034) | about 2 months ago | (#47162385)

That's a routine sale of unregistered securities case. If he'd sold them for dollars or yen, the SEC would have done the same thing. Bitcoin is irrelevant here.

Re:Routine unregistered securities case (4, Informative)

DontLickJesus (1141027) | about 2 months ago | (#47162391)

Exactly. Title is misleading. Crime was for unregistered securities.

You've got to see this (-1)

Anonymous Coward | about 2 months ago | (#47162425)

Actually you don't lol but... TheCleanGame[.]Net/multicoin has info that will pay you in bitcoin every 10 minutes.

LOVING BItcoin! LOL

Re:Routine unregistered securities case (1)

Anonymous Coward | about 2 months ago | (#47162431)

His profits here (profits, not proceeds, since he later liquidated the security with a buy-back clause) were in excess of $10 million (well, with Bitcoin at $800). Is it normal for someone making $10m on an unregistered security to walk with a 50k fine?

Re:Routine unregistered securities case (2)

MaskedSlacker (911878) | about 2 months ago | (#47162627)

Welcome to the world of white collar crime. Yes, that is normal.

SEC asserting its monopoly on securities protectio (0)

Anonymous Coward | about 2 months ago | (#47162413)

This is merely the protection racket (SEC) asserting its power to provide "protection" to would-be investors.

Too bad they don't take responsibility when they fail at providing the protection services they assert are necessary.

Re:SEC asserting its monopoly on securities protec (1)

jklovanc (1603149) | about 2 months ago | (#47162429)

I take it you are perfect. Do you blame the police when someone gets murdered?

SEC (0)

harvey the nerd (582806) | about 2 months ago | (#47162459)

The tech bubble ca 2000 and the mortgage fiasco were perfectly forseeable. Didn't notice SEC do much of anything meaningful before or after.

Re:SEC (5, Informative)

jbeaupre (752124) | about 2 months ago | (#47162513)

Because the SEC's job isn't to stop stupid. Its job is to stop fraud. Distinguishing the two can be tricky. Selling unregistered securities is one area that has been designated at fraudulent. Selling over overpriced or excessively risky investments has not been designated fraud as long as the buyer isn't knowingly fed false information.

Re:SEC (1)

jythie (914043) | about 2 months ago | (#47162817)

Though to be fair, the securities were being packaged so that the risk was intentionally hidden, which could reasonably be considered fraud. If not so profitable it probably would have been considered illegal. More importantly, if some small time scam artist was doing the same practice they probably would have been charged.

Madoff (0)

Anonymous Coward | about 2 months ago | (#47162917)

And they did such a good job stopping Bernie Madoff's fraud....

Re:Madoff (2)

Goaway (82658) | about 2 months ago | (#47163093)

Similarly, because murders still happen, we don't need the police.

Re:Madoff (0)

Anonymous Coward | about 2 months ago | (#47164175)

Similarly, because murders still happen, we don't need the police.

No, because murders still happen we need to keep in mind how laws and the police function when we pass more laws that will supposedly fix things so that a situation will never happen again. Likewise for new securities laws and regulations that are dishonestly marketed as a cure to prevent some fraud from ever happening again.

Re:Madoff (1)

Archangel Michael (180766) | about 2 months ago | (#47164285)

Police don't necessarily prevent murder, but they are there to clean up the mess. SEC is trying to prevent murder, and failing miserably.See "Mortgage Backed Securities".

Life without police (1)

sjbe (173966) | about 2 months ago | (#47166269)

Police don't necessarily prevent murder, but they are there to clean up the mess.

Go live somewhere were there aren't any police (like Somalia) and let me know how that works out for you. I'm sure you'll live a long an prosperous life.

Re:SEC (3, Insightful)

jythie (914043) | about 2 months ago | (#47162815)

They are foreseeable in hindsight. At the time there was a lot of reasonable debate about what was happening and what the consequences would be, with very little prediction of the scale that occurred.

Don't use bitcoin ! (0)

Anonymous Coward | about 2 months ago | (#47162507)

This news made me shivers :
  Bitcoins story [youtube.com]
Don't use Bitcoins, $ is the best currency.

do I even want to know? (1)

Anonymous Coward | about 2 months ago | (#47162561)

Maidsafe, a system for sharing computer memory, raised $7 million last month in such a deal.

I have this horrible feeling that I don't even want to know what that is...too afraid to even google it

Ironic (3, Insightful)

Anonymous Coward | about 2 months ago | (#47163019)

Vorhees is a man who is an extremist libertarian to the point of nearly being an anarchist. He spent most of the last few years hating on regulators and government in general, and moved to Panama to escape US regulation. He is one of the foremost in the "Bitcoin can't be regulated" school of thought. So the fact that he's now sending a big pile of dollars to the US Govt is .... ironic.

Still, the real question here is the merits of the case. A Twitter spamming service and a gambling site are hardly businesses making great contributions to society but he doesn't seem to have actively hurt anyone by issuing these securities. The filing suggests all he had to do, to be legal, was file a registration statement with the SEC. I wonder how much effort is involved in doing that. Is it one of those cases where it's extremely hard to be legally compliant for a relatively small $337,000 raise or could he have easily gone through the registration process?

I bet the sticking point would have been the exchanges. MPEx is shady as hell.

Re:Ironic (0)

Anonymous Coward | about 2 months ago | (#47163079)

Normally one would go to a investment banker which does “full service”. Register, market, etc. Not sure how much a “do it yourself” raise would cost. Minimum of a few thousand for auditors to vet the books and lawyers to draw up and file papers.

For major markets their fee is around 2.5% to 5% of the money raised.

Penny stocks are different – it is a den of snakes. There is so much fraud there it is hard to know what the average price is. I will be honest, most of the cases I have seen are fraudulent so my view is skewed. I have heard of cases which the bankers take is as 50%. I have heard of other cases where the bankers only take 10% to 15% and get a heap of cheap warrants. See Wolf of Wall Street for an example.

Re:Ironic (2)

tomhath (637240) | about 2 months ago | (#47163247)

So the fact that he's now sending a big pile of dollars to the US Govt is .... ironic.

There is nothing ironic (or surprising) about a guy who thinks he doesn't need to play by the rules getting caught and fined.

Re:Ironic (0)

Anonymous Coward | about 2 months ago | (#47166391)

And who says the SEC gets to make rules binding on him? They are supposed to regulate publically traded companies.

I would tell the SEC to kiss off. Only a court order can require a person to pay a fine. And the SEC has no real authority to do so, and he has no obligation to register any bitcoin transactions. The SEC does not own it, nor control it.

And I don't see the SEC finning banks or big corporations that do unregistered trades, and if they do, it ammounts to a tiny amount, compared to the amount of money made. In this case he is suposed to pay a lot more than he made?

No. Don't put up with that, or you will be a slave your entire life.

Re:Ironic (1)

PPH (736903) | about 2 months ago | (#47164163)

and moved to Panama to escape US regulation.

all he had to do, to be legal, was file a registration statement with the SEC.

Why? He's doing business from Panama. US regulators can FOAD if they think they have the right to regulate the planet. If some US investors bought these securities, then that shoud be between them and the SEC. Not Vorhees.

Re:Ironic (3, Informative)

Minwee (522556) | about 2 months ago | (#47164739)

Why? He's doing business from Panama. US regulators can FOAD if they think they have the right to regulate the planet. If some US investors bought these securities, then that shoud be between them and the SEC. Not Vorhees.

That's nice, dear.

"Voorhees, age 29, is a U.S. citizen who, at the time of the FeedZeBirds and SatoshiDICE offerings, was living in the United States."

[...]

"As a result of the conduct described above, Voorhees violated Sectons 5(a) and 5(c) of the Securities Act, which prohibit the direct or indirect sale of securities, offer to sell or offer to buy securities through the mails or interstate commerce unless a registration statement has been filed or is in effect. "

So a US citizen, living in the US, sells securities to US investors in violation of US law, but he should walk because he used a .PA email address to do it?

Okay, that makes sense. It's not very much different from how a US citizen is able to make a phone call to Romania to hire a hit man. That's totally legal because part of the call takes place in another country, right?

Re:Ironic (0)

Anonymous Coward | about 2 months ago | (#47165967)

> Why? He's doing business from Panama

No, he fled the US when he learned that the SEC was investigating him. All the activity in question happened when he was living in NY, NY and blogging about how the government needed to be overthrown and that he'd never pay a dime in taxes.

fucioffbeta (0)

Anonymous Coward | about 2 months ago | (#47163057)

fibeta

neat (0)

Charliemopps (1157495) | about 2 months ago | (#47163173)

Glad to see the FCC is focusing their efforts of the important stuff. I'd hate it if they were bothering with unimportant issues. [cnn.com]

Cryptoshares... lol (0)

Anonymous Coward | about 2 months ago | (#47165155)

Good. Took one look at the "bitcoin securities" market and laughed my arse off at the idea anyone would seriously "invest".

"Give me your bitcoins and I'll issue you some CRYPTOSHARES in my business! They're like regular shares, only they don't actually give you any equity, don't commit me to paying you dividends, don't entitle you to a share of the massive windfall I make if I sell out, and I can buy them back at any time and cancel them for whatever price I think fit!"

Yeah.

I'll get right on that.

Stupid honest question. (0)

Anonymous Coward | about 2 months ago | (#47165919)

Is there a huge difference between a kickstarter and selling shares via bitcoin?

In Kickstarter you normally get "property" for your "donation".

VS

Selling shares for bitcoin, might make you bitcoin (property according to the IRS).

Re:Stupid honest question. (1)

david_thornley (598059) | about 2 months ago | (#47167165)

Honest answer: Yes, there is a big difference. The difference is selling stuff vs. selling shares. I've contributed to Evil Hat kickstarters, and gotten stuff from them, but I have no connection with them other than as a customer. I don't own any part of the company.

Tell them NO (0)

Anonymous Coward | about 2 months ago | (#47166229)

I would tell the SEC to kiss off. Only a court order can require a person to pay a fine. And the SEC has no real authority to do so, and he has no obligation to register any bitcoin transactions. The SEC does not own it, nor control it.

And I don't see the SEC finning banks or big corporations that do unregistered trades, and if they do, it ammounts to a tiny amount, compared to the amount of money made. In this case he is suposed to pay a lot more than he made?

No. Don't put up with that, or you will be a slave your entire life.

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