Bitcoin Investment Trust and Genesis Trading Settle With SEC

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11 July 2016

The US Securities and Exchange Commission (SEC) has issued a cease-and-desist order against the Bitcoin Investment Trust (BIT) and its authorized participant SecondMarket, the latter of which has been ordered to disgorge roughly $50,000 in a settlement with the agency.

Originally founded by investor and Digital Currency Group CEO Barry Silbert when he was CEO of SecondMarket, the BIT issues shares with a value tied to the value bitcoin, and unrestricted shares of the BIT are quoted on OTCQX. Newly issued shares are restricted and cannot be quoted on OTCQX.

Specifically, the cease-and-desist order relates to a share redemption program conducted in 2014. According to disclosures published last year by Grayscale, the program drew the attention of SEC regulators because the repurchases took place as shares were being created by the trust – in violation of Regulation M, the SEC said in its release today.

As part of its redemption program, SecondMarket repurchased 85,721 shares between 2nd April and 4th September, 2014, the SEC said, earning $51,650.11.

From the SEC:

“The SEC’s Rule 101 of Regulation M prohibits distribution participants and their affiliated purchasers from purchasing any security that is the subject of a distribution until after the applicable restricted period. Rule 102 prohibits the same activity by issuers, selling security holders, and their affiliated purchasers.”

The SEC contacted SecondMarket later that month, documents show, and the redemption program was shut down in late October.

The agency noted in its cease-and-desist that SecondMarket relied on outside legal advice prior to the launch of the redemption program, and that this factored into the agency’s decision.

According to the cease-and-desist notice, SecondMarket and the BIT have agreed to abstain from further SEC violations, and SecondMarket will pay the $51,650.11 it earned plus roughly $2,100 in interest.

When reached for comment, Genesis and Bitcoin Investment Trust sought to stress that “no monetary penalties were assessed” and that the companies did not “admit or deny” any charges.

The full statement from the firms can be found below:

“As reported earlier today, without admitting or denying, Genesis Global Trading, Inc (‘Genesis’) and the Bitcoin Investment Trust (‘BIT’) have agreed with the Securities and Exchange Commission (‘SEC’) to settle charges that they violated Rules 101 and 102 of Regulation M. Genesis has agreed to pay disgorgement of $51,650.11 in fees it collected in connection with the implementation of a shareholder redemption program. No monetary penalties were assessed. As noted by the SEC, prior to the implementation of BIT’s shareholder redemption program, Genesis sought and received legal advice regarding the development and implementation of that program. Genesis and BIT are happy to have this matter behind them, and Genesis looks forward to continuing to serve as the authorized participant of the BIT.”

Correction: An original version of this article stated SecondMarket was the issuer of the BIT investment vehicle, not the authorized participant, and that shares represent the value of bitcoins held by the BIT, which was inaccurate.

Disclaimer: CoinDesk is a subsidiary of Digital Currency Group. Genesis Trading is also a subsidiary. 

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