The US Court of Appeals for the 11th Circuit ruled in favor of investors Friday against BitConnect, an alternative cryptocurrency that the court called a Ponzi scheme.
Before a three-judge panel, a small group of investors suing on behalf of themselves as well as all other investors (“the plaintiffs”), sought to hold BitConnect and its promoters liable under § 12 of the Securities Act of 1933 (“the Act”).
BitConnect advertised itself as a new type of cryptocurrency that could guarantee substantial returns. These returns, however, were not the result of an increase in the cryptocurrency’s value, but the result of funds collected by subsequent waves of investors. To create the promised “returns,” investors were incentivized to recruit others whose investments were then distributed up the chain. In the words of the 11th circuit, it was “a classic pyramid scheme.”
Nevertheless, the US District Court for the Southern District of Florida refused to apply the Act. Section 77 of the Act prohibits a person from using “any means or instruments of transportation or communication” for the sale of unregistered securities, and § 12 allows buyers of an unregistered security to sue the seller. The district court adopted a narrow interpretation of these provisions, finding that § 12 can only be invoked where the seller specifically targeted the individual buyer. Because BitConnect’s advertising was directed to the public at large through online videos, the court concluded that the plaintiffs did not have a claim.
But the 11th Circuit chose a broader interpretation: “Solicitation has long occurred through mass communications, and online videos are merely a new way of doing an old thing. Because the Securities Act provides no free pass for online solicitations, we reverse.”
Regulators worldwide are under pressure to adapt to the risks posed by fraudulent and unregulated cryptocurrency like BitConnect. In September, the Department of Justice announced its newest cybersecurity initiative, the National Cryptocurrency Enforcement Team. Globally, numerous countries have adopted or proposed greater restrictions on the mining and use of cryptocurrencies, including Russia and Canada. Earlier this month, India announced a new tax regime on transfers of cryptocurrencies, while explicitly warning that such a tax “does not attach any legality” to the crypto trade.
In the meantime, the 11th Circuit’s decision gives defrauded investors in the US a new avenue of relief.
