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When the head of the U.S. Securities and Exchange Commission told members of Congress this month that the regulating body would remain diligent in rooting out the bad actors in the crypto space, there may have been doubts.

However, it’s proving it meant business.

On Friday, it suspended trading in three companies amid questions surrounding statements they made about acquiring cryptocurrency and Blockchain technology-related assets.

Let’s discuss.

Are you really in the crypto business?

The hype around the crypto space has attracted all kinds of people seeking to profit from its growth. Unfortunately, this includes people who are simply trying to rip off others who are gravitating to the space in hopes of capitalizing on the meteoric rise of cryptos’ prices, especially Bitcoin.

One of the most egregious scams being pulled relates to publicly-traded companies trying to take advantage of investors by claiming their businesses are in the Blockchain or crypto business. Companies that have done this have seen their stock prices skyrocket as investors scurry to “get in early” on the hopes that the companies’ stocks will rise as meteorically as cryptos’ prices.

Unfortunately, in many cases, investors learn too late that the company has no ties to anything related to the crypto space.

When the SEC heard of three penny stock companies that were touting their questionable affiliations to the crypto space, it took action by sending them suspension orders. The receivers, which all trade over-the-counter (OTC), are:

  • Cherubim Interests Inc. (CHIT)
  • PDX Partners Inc. (PDXP) and
  • Victura Construction Group Inc. (VICT)

Cherubim Interests proclaims to specialize in alternative construction projects, as well as real estate development. PDX Partners makes iPhone apps, and Victura states on its website that it is a holding company focused on strategic acquisitions within the construction industry that service both residential and commercial sectors.

Questionable crypto-asset buying

According to the SEC, all three companies bought triple-A rated assets from a subsidiary of a private equity investor in cryptocurrency and Blockchain technology among other things.

In January, the companies announced their acquisitions of trust units in a private equity fund called NVC. When the news of the transactions was released, all kinds of claims were made, including one that leaped off the page.

NVC claims to have $10 trillion dollars of assets under management, noted CNBC. That would mean that its assets under management are more than the entire private equity industry.

Hmmm.

CNBC reported:

The companies all announced in January the acquisition of trust units in a private equity fund that strangely claims to be exponentially larger than Blackstone.

Blackstone’s assets under management total roughly $435 billion.

According to the SEC’s orders, there are questions regarding the nature of the companies’ business operations and the value of their assets, including these press releases.

Other issues that drew the SEC’s ire directly relate to Cherubim. It’s delinquent in filing annual and quarterly reports, according to the SEC. Then there are the company’s plans to launch a $100 million initial coin offering.

The SEC has been all over these ICOs because too many of them are just scams. In August 2017,  it released an alert about companies that may publicly announce ICO or coin/token related events to affect the price of the company’s common stock.

Caught in a lie?

At the helm of these three companies is a former NFL player turned CEO. Each company lists as CEO a Patrick Johnson.

In one of Cherubim’s press releases, the ICO is distinctly discussed. Take this excerpt, for example:

 "The sale of the coins will generate capital to create self-sustaining intentional communities across the US and across 57 nations. Municipal and rural infrastructures may be improved through the investment into eco-friendly housing and businesses that create products and services for the benefits of the community and to consumers."

But on Friday, Johnson told Oregon Live that his businesses have nothing to do with cryptos.

"We're not in the crypto space at all."

The Oregon media outlet added that Johnson said he’d not been asked for any specific information by the SEC, but if the regulatory body asked for anything, he would cooperate.

Too many red flags

In the SEC’s release about these companies, it’s stated:

There are questions regarding the nature of the companies’ business operations and the value of their assets, including in press releases issued beginning in early January 2018.  Additionally, the Commission suspended trading in the securities of CHIT because of its delinquency in filing annual and quarterly reports.

Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office, said: 

 “This is a reminder that investors should give heightened scrutiny to penny stock companies that have switched their focus to the latest business trend, such as cryptocurrency, Blockchain technology, or initial coin offerings.”

Under the federal securities laws, the SEC can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met.