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The U.S. Securities Regulatory Authority has fined cryptocurrency exchange Coinme nearly $4 million for allegedly offering unregistered securities and making “misleading statements” about its UpToken (UP) cryptocurrency token.
On April 28, the Securities and Exchange Commission (SEC) said it had settled charges against Coinme, its subsidiary Up Global SEZC, and CEO of both firms, Neil Bergquist.
Up Global has agreed to pay a $3.52 million fine, which Coinme is also responsible for. Separate fines against Coinme and Bergquist of $250,000 and $150,000, respectively, were also aligned, which both agreed to pay.
In its ruling, the SEC argued that the initial coin offering (ICO) of UP Coinme, Up Global and Bergquist between October and December 2017 was an investment contract under the Howey test and was subsequently an unregistered securities offering.
The ICO raised about $3.6 million to increase the number of Bitcoin (BTC) ATMs in the Coinme park, which added 30 ATMs using ICO funding. UP holders have received benefits such as commission discounts and a 1% cash back payable in UP when using ATMs.
In January 2019, Coinme changed its offering and partnered with Coinstar to use its cash counting kiosks to facilitate cash-to-crypto transactions rather than its own ATMs. By July 2019, Coinme closed all of its ATMs.
“UpToken is not currently in use and UpToken holders can no longer use UpToken to receive the benefits described in the UpToken offer materials.”
Since then, UP’s price has declined significantly, its market cap has also dropped to around $50,000, and 24-hour trading volumes have topped just over $180.
According to the SEC, Bergquist and Up Global also made “false and misleading statements” about the demand for UpToken and the amount raised in the offering.
Up Global said that buying Coinme UP to fund its ATM rewards program would create continued demand for the token, but the SEC said:
“Bergquist and Up Global took steps before and during the ICO to obtain a supply of UpTokens that would substantially reduce Coinme’s need to purchase UpTokens after the ICO for the ATM Reward Program.”
The SEC stated that Coinme sent 160 BTC, worth over $1 million at the time, to the Up Global wallet, which was used to receive investor funds in the ICO. Up Global returned about 14.5 million UP to Coinme at a discount, and the transaction “knowingly or recklessly” made it appear that a third party had made a large purchase.
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In another example, it was alleged that Bergquist negotiated a two-way transaction of 500 Bitcoin worth of UP tokens with an unnamed Hong Kong company, with Coinme borrowing the funds to purchase additional UP at a discount. The transaction was also used to create an impression of demand for tokens.
The Securities and Exchange Commission said Bergquist neither acknowledged nor denied the regulator’s findings, agreed to settle the charges, and was barred from serving as an executive director of a public company for three years.
Cointelegraph contacted Coinme for comment but did not immediately receive a response.