SEC Sues NAC Foundation Over Unregistered “Superior” BitCoin

The Securities and Exchange Commission (SEC) sued
the NAC Foundation and Rowland Marcus Andrade in the Northern District of
California on Thursday for securities violations, claiming the defendants
misled consumers with the unregistered sale of securities that defendants
claimed to be an improved version of bitcoin, but did not live up to these
promised improvements.

The NAC Foundation “was in early-stage development of a
blockchain-based digital token called AML BitCoin, which NAC claimed was
superior to the original bitcoin because it had purported anti-money
laundering, know-your-customer, and other security features encoded in the
smart contracts for the token.” It also claimed to be compliant with
cryptocurrency regulatory requirements, but was not, according to the SEC.

The SEC alleged that “while the proprietary anti-money laundering,
know-your-customer, and other security features of AML BitCoin had already been
developed, certain additional features of the token and NAC’s ‘privately
regulated public blockchain’ were still being completed. As a result, NAC
stated that it would initially issue tokens with the symbol ABTC (‘ABTC
tokens’) that could eventually be exchanged one-for-one for functional AML
BitCoin tokens.” The ABTC tokens were available in May 2018 on third-party
platforms. However, “[a]t no time did the ABTC tokens have any use” because
“NAC did not have a platform where the ABTC tokens could be used to purchase
goods or services or transact any business, they could only be exchanged for
other digital assets or fiat currencies on certain third-party digital asset trading
platforms.”

The defendants raised at least
$5.6 million from 2,400 investors from the sale of these allegedly unregistered
securities between at least August 2017 and December 2018. “ABTC tokens could
be purchased…at prices ranging from $0.35 to $0.45 per token in the pre-sale
phase of the offering prior to the ICO phase,
then at prices ranging from $1.00 to $1.50 per token in the ICO and after.” The SEC stated that
the tokens NAC offered, including its public initial coin offering (ICO),
constituted a security under federal law.

The tokens were also marketed in a
way that made them seem tradeable and that they would appreciate in value.  NAC and Andrade also deceived customers
through their promotion materials, and they made it seem like “they were on the
verge of airing a Super Bowl commercial for AML BitCoin that they falsely
claimed was rejected.” The defendants allegedly made false statements about
NAC’s business to investors, including the development of the AML BitCoin
tokens and the company’s finances. NAC portrayed to investors that its
technology was better than the original bitcoin, but this and the other
statements were allegedly materially false. Specifically, “NAC had not
developed any of the claimed features of the AML BitCoin tokens and that NAC
only had introductory meetings with government agencies,” none of which led to
the government’s use of these tokens.

Additionally, the SEC claims that defendant Andrade “took
steps to manipulate the market for ABTC tokens and artificially increase the
trading volume and value of the ABTC tokens on digital asset trading platforms.”
Further, Andrade allegedly misappropriated $1.1 million of the offerings for
his own use, including to buy two properties one for him and one for his father
and two buy two vehicles.

The SEC asserts that since NAC’s token is a security, it was required to register the security with the Commission, to ensure “full and fair disclosure…to the investing public to provide sufficient, accurate information to allow investors to make informed decisions before they invest.” This requires disclosing financial and management information about the issuer, terms for the securities offering, the proposed use of the investment funds, and an analysis of risks and trends. However, defendants did not provide the SEC with this required information, nor did they obtain an exemption; the SEC adds that defendants are not eligible for an exemption. As a result, the NAC failed to disclose this information to investors. 

The defendants are accused of violating the Securities
Exchange Act of 1934 and Rule 10b-5 through the sale of their unregistered
securities and for their misrepresentations or false statements and allegedly
fraudulent activities. They also violated the Securities Act of 1933 because of
their alleged sale of unregistered securities, false statements, and unlawful
conduct.

The SEC has sought to permanently enjoin defendants from
further violating these Acts; to prevent them from “participating in the
issuance, purchase, offer, or sale of any securities”; for defendants to
disgorge all unjust enrichment or ill-gotten gains from their conduct; for
defendants to pay a civil penalty; to prevent defendant Andrade from serving as
an officer or director of any entity that has registered securities with the
SEC; to retain jurisdiction of this action to enforce the entered orders and
judgment; and other relief as determined by the court. 

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