B.C. crypto firm ordered to pay $3.3M for misleading investors, illegal securities distribution
B.C. Securities Commission says NetCents made false claims and operated unauthorized crypto exchange
A Vancouver-based company that created and sold its own cryptocurrency has been ordered to pay more than $3.3 million to the B.C. Securities Commission (BCSC) after admitting it illegally distributed securities and misled investors.
NetCents Technology Inc. reached a settlement with the provincial financial markets regulator earlier this month over misconduct linked to the company's launch of the "NetCents Coin" in 2017.
In a statement, the BCSC says the company sold the coin to approximately 500 investors in B.C. and elsewhere, raising more than $3.3 million without filing a prospectus — "a formal document providing details of an investment."
"Without a prospectus, or an exemption from the prospectus requirement, NetCents illegally distributed securities," the securities commission said in a statement earlier this week.
It says the funds, which were frozen in November 2018 by BCSC's order, will be returned to affected investors.
According to the agreement, NetCents made several false or misleading claims in promotional materials and on its website. This included suggesting that the coin was being managed by an independent non-profit entity called the NetCents Coin Organization.
The company also ran a separate website for a so-called non-profit called NetCents Coin Foundation that claimed to "administer, promote and maintain the Coin on behalf of the community of coin holders."
But investigators say neither of those organizations existed and proceeds from sales of the coin went to NetCents.
NetCents also falsely claimed in multiple November 2017 news releases that its initial coin tranches had sold out and that the coin's value had quadrupled.
The BCSC settlement agreement also mentions a YouTube video posted earlier that year where the company claimed monthly revenues of $100,000, even though financial disclosures showed less than that amount was made in the entire year.
In addition, the company operated an online exchange where users could trade NetCents Coin, but it failed to apply for or receive recognition from the commission, a violation of the Securities Act.
The settlement agreement says NetCents has acknowledged all these facts as part of the settlement, which mitigated the consequences doled out to it.
Under the agreement, NetCents is prohibited from trading securities, acting as a registrant or promoter, or engaging in promotional activities on behalf of others or itself.
Growing online investment frauds
Doug Muir, the BCSC's director of enforcement, says the case highlights broader risks in crypto investing and online fraud. He says there has been "a large surge in the amount of online investment fraud."
"The commission issues alerts, sometimes several times a week, about suspicious websites that haven't been registered to operate in Canada," Muir told CBC News.
"We're aware that the people behind these online investment frauds are not located in Canada and there's evidence that a lot of them are being run by organized crime outside Canada," he said, adding that it's "extremely difficult" to track down the people behind it and hold them accountable.
He says the NetCents case was different because the company was operating out of B.C., allowing the commission to pursue enforcement action.
However, investigations such as this take a lot of time and effort, says Muir.
"We require a lot of information and not all of it is in British Columbia," he said. "These types of cases do span borders. So we may be required to get information through our fellow regulators either in Canada or around the world."
Muir advises investors to be cautious about offers that promise exceptionally high or guaranteed returns.
"We want people to stop and think about the source of the information. Who's told them about this investment? Are they being pressured to invest? And does anything just not ring true for them?"
He encourages investors to visit the BCSC's educational site, investright.org, to learn more on how to recognize fraud.
There are about 17 to 18 crypto trading platforms currently authorized to operate with Canadian investors, and Muir says investors should only use those that are registered with the Canadian Securities Administrators. NetCents was not among them.
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