Riot Blockchain, the cryptocurrency company whose stock price skyrocketed after changing its name, revealed that the Securities and Exchange Commission has begun an investigation that could result in a stop order preventing the company and stockholders from selling shares under particular registration statements.
In its second quarter earnings, released Tuesday, the company said it received a letter from the SEC on July 30 saying the agency has begun the action "Pursuant to Section 8(e) [of] the Securities Act of 1933."
The SEC is specifically interested in the information contained in three registration statements, according to Riot Blockchain's latest quarterly regulatory filing.
The Securities Act of 1933 in section 8 says, "If it appears to the Commission at any time that the registration statement includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, the Commission may… issue a stop order suspending the effectiveness of the registration statement."
That means no shares can be traded until any deficiencies or misleading information is corrected, according to an SEC press release unrelated to Riot Blockchain.
A call and email Wednesday to John O'Rourke, Riot's CEO, were not immediately returned.
Riot first revealed in April that the SEC had sent it a subpoena for information. In its most recent quarterly filing, Riot said, "The Company is engaged in conversations with the staff of the Division of Enforcement, Division of Investment Management and Division of Corporation Finance about their concerns and intends to cooperate fully with the examination."
Shares of Riot dropped more than 12 percent on Wednesday.
Lawyers said the disclosure was a potentially troubling development. "This SEC subpoena and the order do not appear to be the type of regularly issued subpoena in the normal course of the SEC's oversight of registrants. The company has to take this very seriously," said Reed Brodsky, a partner with Gibson Dunn. "An adverse finding by the SEC could be devastating to the company."
Jake Zamansky of the securities law firm Zamanksy LLC, said, "The fact that the SEC division of enforcement is involved suggests they are considering securities fraud action against the firm."
In its quarterly filing in May, the company said the subpoena was part of a formal investigation. "The Company has received and responded to comments from the staff of the SEC regarding certain developments and the Company's ongoing development of a blockchain/cryptocurrency business model. These inquires include the proper asset classification, applicability of the Investment Company Act [of] 1940, to the Company's business and affairs and accounting treatment of its cryptocurrency."
Riot is currently mining for cryptocurrency at a facility in Oklahoma City.
"I cannot comment on the subpoena," said O'Rourke after a shareholder meeting in May. "We don't know the nature of the investigation and that's all my attorney advised me to comment on."
The SEC declined to comment.