A Bitcoin mining startup has settled for $1 million with Massachusetts’ securities regulator after allegedly hiding its promoters’ previous violations.
According to Law360, Florida-based US Data Mining Group carried out a $25 million Series A funding round without registering with the state securities watchdog.
Two people who helped to form and promote the company were already sanctioned by the US Securities and Exchange Commission (SEC).
In 2019, John Stetson and Mark Groussman reached a settlement with the SEC over a $27-million microcap (read: penny stock) investment fraud scheme. They were DMG’s primary investors and debt financiers.
The SEC described the past wrongdoing as a “classic pump-and-dump” scheme that perpetrated “lucrative market manipulation.”
The charges were leveled at 10 individuals including Riot Blockchain chief John O’Rourke and Florida businessman Barry Honig. The latter once held a major stake in DMG.
(It should be noted that Fort Lauderdale-based US Data Mining Group is a different company from the publicly-traded Canadian Bitcoin mining firm DMG Blockchain Solutions.)
At the time, Stetson and Groussman were ordered to pay over $1 million each in civil penalties and disgorgement. They were also subject to lengthy bans from activities relating to the sale of securities.
The regulator alleges that this information was obfuscated from investors. DMG knew that Stetson and Groussman were considered “bad actors” by the SEC.
“DMG did not provide the clear and unambiguous language contained in the December 4, 2020, promissory note,” the regulator said (via Law360).
“Instead DMG included a vague disclosure schedule naming [the promoters] and providing hyperlinks to the [SEC’s] action.”
The regulator said that DMG should have been aware that it was breaking the law by offering investments for its Bitcoin mining operation. It’s unclear whether they registered with other state regulators.
Bitcoin mining startup settlement demands it pay back investors with interest
According to the securities division of the Office of the Commonwealth of Massachusetts, just under $3.5 million came from investors in Massachusetts. Five backers from the state purchased 3,707 shares at $795.59 each.
DMG, which did not admit or deny the charges as part of the settlement, now must refund investors from Massachusetts with interest.
In response to DMG’s settlement, Secretary of the Commonwealth of Massachusetts William Galvin repeated warnings about risky Bitcoin investments in a statement on Tuesday.
“I can’t stress enough the importance of knowing who you’re dealing with when you invest your money,” he said (via Law360, our emphasis)
“This is especially important when your investments involve Bitcoin mining and cryptocurrency, which have in recent years been popular vehicles used by scammers to defraud innocent investors.”
While DMG is a private, centralized company and its business practices have almost nothing to do with the crypto asset it wants to mine, Galvin holds a cautionary stance where crypto is concerned.
He’s previously relied on the tulip mania meme to make his point. Critics often compare Bitcoin’s meteoric rise to the short-lived speculative bubble in Dutch tulip markets during the 17th century.
In 2017, Galvin warned investors of so-called ‘Bitcoin mania,’ saying: “Bitcoin is just the latest in a history of speculative bubbles that most often burst, leaving the average investors with a worthless product.”
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