Bitcoin business owner fined by SEC over share sales

By Stephen Foley and Kara Scannell in New York

June 3, 2014 6:40 pm - Financial Times

A prominent libertarian supporter of Bitcoin has been fined by the Securities and Exchange Commission for illegally selling shares in two business ventures, as the US authorities try to clamp down on a shadow world of unregulated share trading in virtual currency.

Erik Voorhees, who moved from the US last year to operate Bitcoin ventures outside the purview of US laws, agreed to pay more than $50,000 to settle charges over what he had presented as a kind of public flotation of the ventures.

Mr Voorhees and others were the owners of SatoshiDice, a gambling game in which users could win Bitcoin, and FeedZeBirds, which paid users in virtual currency when they retweeted promotional material on Twitter.

Their shares were denominated in Bitcoin and traded on two unregistered exchanges operating outside the US. Regular trading updates and purported financial results were posted on the exchanges’ website.

Mr Voorhees was based in the US at the time of the sales, according to documents filed by the SEC. SatoshiDice raised 10m Bitcoin in the sale of 10 per cent of the company between August 2012 and January 2013, while FeedZeBirds raised 2,600 Bitcoin.

In US terms, Mr Voorhees made no money on SatoshiDice, because he bought back the shares and sold the venture last year, but the FeedZeBirds stake was worth $15,000, which he has agreed to pay to the SEC. There is also a fine of $35,000 and other fees, and Mr Voorhees agreed not to sell any more securities. It is the first case where someone has been banned specifically from offering securities in exchange for virtual currencies.

A number of Bitcoin enthusiasts have been drawn to trading in shares of virtual currency companies, or other financial instruments such as Bitcoin derivatives, traded in Bitcoin on unregulated websites. MPex, the Romanian exchange where SatoshiDice used to trade, currently lists four stocks, one fund and five derivatives for trading.

Mr Voorhees once lived in New Hampshire as part of a libertarian project to “colonise” the tiny US state, and he moved to Panama last year as international interest in Bitcoin took off.

“The US regulatory burden is severe and absurd,” he told the Financial Times in an instant message conversation last year. “Business flows toward the path of least resistance . . . and the US is increasingly the path of most resistance.”

The case comes as the SEC has stepped up its efforts within its enforcement division on virtual currency frauds and as it seeks to focus public attention on potentially illegal schemes.

They are concerned that scam artists are trying to lure investors into investments denominated in virtual currencies or attract them to Bitcoin technology-based companies.

In February, the SEC issued a trading suspension of Imogo Mobile Technologies, a Seattle-based company that said it was developing a “mobile platform for Bitcoin that enables both consumers and business owners to buy and sell bitcoins and to also use bitcoins to pay for products and service.” The SEC issues trading suspensions when it believes information issued by the company is incorrect.

Last year, the SEC sued a Texas man for allegedly running a Ponzi scheme he promoted through a Bitcoin-denominated strategy. That case is still being litigated.