NextBlock triggered SEC proceedings during funding efforts

Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes.

As always, Rosario summaries are “NMR” and Palley summaries are “SDP".

[related id="1"]In the matter of NextBlock Global Ltd. and Alex Tapscott, Administrative Proceeding File №3–19164, Issued 5/13/2019 [NMR]

Link to order

This order concerns the settlement of an administrative proceeding that the SEC brought against NextBlock Global Ltd. and Alex Tapscott. If you are familiar with the world of blockchain thought leadership then you should be familiar with the name Tapscott, that’s because Alex Tapscott is Don Tapscott’s son and together they wrote a book called Blockchain Revolution, published in 2016. The Tapscotts are prolific and prominent influencers in the corporate blockchain world, so this settlement is certainly notable because of the players involved.

NextBlock was a blockchain-focused investment fund founded in Canada in June of 2017 by Tapscott (Alex) and three others. NextBlock began fundraising taking in investments in Canada, the US, and elsewhere. In fact, NextBlock filed for a Form D exemption with the SEC on Aug. 11, 2017. Some may recall what happened next.

It turned out that as part of their fundraising efforts the NextBlock team claimed that they had four prominent blockchain advisors as part of their team. Spoiler alert: said advisors were not in fact advisors for NextBlock. Oops. News of this came out in November of 2017, which led to uhh, interesting discussions on CryptoTwitter. This news broke in the middle of a second fundraising round for NextBlock. To the team's credit, they shut down the fundraising round and began the process of winding up the company in Canada and returning investor funds.

What exactly did NextBlock do that caused the SEC to initiate the proceedings? Well, you can’t claim you have advisors that aren’t actually advisors, because that is a “[violation] of Section 17(a)(2) of the Securities Act, which prohibits any person in the offer or sale of securities from obtaining money or property by means of any untrue statement of material fact or any omission to state a material fact necessary in order to make the statements made not misleading.” With the issuing of this order the SEC, NextBlock, and Tapscott all agree that these violations occurred, and Tapscott will pay a $25,000 civil fine.

One thing that is worth keeping in mind is that (in the case of any order like this one) investors could still theoretically bring a lawsuit against NextBlock and Tapscott “based on substantially the same facts as alleged in the Order instituted by the Commission in this proceeding.” According to findings in a parallel proceeding by Canadian securities regulators, this was not an unprofitable venture for investors, so that may be unlikely in this case. Still, it’s worth noting that if you violate securities laws by making material misstatements of fact you can still be subject to an SEC smack down even if your investors didn’t lose any money.

The Block is pleased to bring you expert cryptocurrency legal analysis courtesy of Stephen Palley (@stephendpalley) and Nelson M. Rosario (@nelsonmrosario). They summarize three cryptocurrency-related cases on a weekly basis and have given The Block permission to republish their commentary and analysis in full. Part II of this week's analysis, Crypto Caselaw Minute, is above.