The SEC issued a cease-and-desist order to CoinAlpha Advisors, LLC and fined the entity $50,000 for violating two provisions of the Securities Act in selling limited partnership interests. (Administrative Proceeding File No. 3-18913)
CoinAlpha is the managing partner of CoinAlpha Falcon, LP, a partnership formed to invest in digital assets. From October 2017 to May 2018, the entities collected approximately $600,000 by selling limited partnership interests to 22 investors residing in five different states. The investors were to receive a pro-rata share of the profits from the partnership’s investment in digital assets.
The SEC charged CoinAlpha with violating Section 5(a) of the Securities Act, which prohibits the sale of securities through interstate commerce or the mails unless a registration statement is in effect, and Section 5(c) of the Securities Act, which prohibits the offer to sell any security through interstate commerce or the mails, unless a registration statement has been filed as to such security with the Commission.
CoinAlpha filed a Form D Notice of Exempt Offering of Securities, claiming an exemption pursuant to Rule 506(b). Under Rule 506(b), an entity may raise an unlimited amount of money from an unlimited amount of accredited investors and up to 35 non-accredited investors deemed “sophisticated”. Importantly, a company offering raising money pursuant to the 506(b) exemption cannot use general solicitation or advertising to market the securities.
CoinAlpha engaged in a general solicitation of public interest in the securities offering through CoinAlpha’s website, which was generally accessible without password protection. Additionally, CoinAlpha solicited investors through blog postings, media interviews, and digital asset and blockchain conferences, accessible both via live attendance and through the Internet.
Despite collecting accredited investor questionnaires and representations from investors certifying to their accredited investor status, CoinAlpha failed to take reasonable steps to verify that investors in the Fund were accredited investors.
It is important to note that CoinAlpha could have solicited and advertised its offerings had it registered under exemption 506(c), which specifically permits a company to broadly solicit and generally advertise the offering.
The SEC adopted Rule 506(c) in 2016 but the Rule comes with several requirements: (1) the purchasers must be accredited investors; (2) the issuer must take reasonable steps to verify the accredited investor status of the purchasers; and (3) the terms of the Securities Act Rules 501, 502(a), and 502(d) must be observed.
CoinAlpha may have been ignorant of the law or may have misfiled its paperwork. Unfortunately, neither provides a defense and CoinAlpha remains on the hook for a civil fine of $50,000. This decision is a reminder to all that entities offering/selling securities must strictly adhere to the requirements of the exemption under which they have filed to avoid prosecution and civil penalties.