A Vancouver-based cryptocurrency exchange has entered a settlement agreement with the provincial financial markets regulator that will see it pay back $3.3 million it raised from investors in a crypto-asset it created and sold.
NetCents, which is described in the settlement agreement as a payment processing company, raised the funds from approximately 500 investors in B.C. and elsewhere who purchased its “NetCents Coin” between Sept. 19 and Dec. 14, 2017.
The $3,341,040.91 in proceeds from the coin sales have been preserved since November 2018, when the B.C. Securities Commission issued an order to freeze the asset while it investigated NetCents for misrepresentations, illegally distributing securities and operating an unauthorized exchange.
In the settlement agreement, which was published on the regulator’s website this week, NetCents admits to all of that misconduct.
Specifically, the company acknowledges that the coin was an investment contract, and therefore a security as defined in B.C.’s Securities Act.
NetCents sold the coin without a prospectus, a violation of the act.
The company also admits in the agreement that it made misleading statements about its corporate structure, the number of coins it had sold, and its monthly revenue.
According to the document, NetCents published a white paper on its website in which it claimed the coin was issued by an independent non-profit organization called the NetCents Coin Organization.
The company maintained a website for the NetCents Coin Organization, which purported to be run by a non-profit called the NetCents Coin Foundation.
“In fact, neither the NCC Organization nor the NCC Foundation, nor any similar independent entity existed during the distribution period, and therefore they could not have done any of the things NetCents claimed they did,” the settlement agreement reads.
“All proceeds from sales of the coin went to NetCents.”
NetCents issued a pair of news releases in November 2017 that contained further misleading statements, according to the agreement.
Those releases claimed that the first and second tranches of coins had sold out and the third tranche was selling.
“In fact, neither the first nor second tranches of the coin had been sold out before either news release,” the agreement reads.
The company also published a YouTube video in January 2017 in which it claimed to have “a monthly revenue of $100,000 and growing.” This YouTube video remained online until at least late September 2019, according to the document.
NetCents did not, in fact, have that much revenue. In the settlement agreement, it admits that its own financial disclosure statement from 2017 showed revenue of less than $100,000 for the entire year.
The company also operated an exchange that allowed users to buy and sell the coins with each other, but never applied to the BCSC to have the exchange recognized, which is another violation of the Securities Act.
The settlement agreement notes that all of the people who were directors and officers of the company at the time of the violations are no longer involved in its management.
It also describes NetCents’ decision to settle the case as a “significant mitigating factor.”
Under the settlement, the company agrees to surrender the $3.3 million in frozen proceeds to the BCSC, and the regulator permanently bans NetCents from a variety of market activities, including trading or purchasing any securities or derivatives, becoming or acting as a registrant or promoter, and engaging in promotional activities.
