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Riot Blockchain reveals SEC investigation could lead to order blocking share sales

Key Points
  • The company first revealed in April that the SEC had sent it a subpoena for information. In its most quarterly report, Riot said it "intends to cooperate fully with the examination."
  • Shares of Riot fell more than 12 percent on Wednesday.
  • Riot has not been in the cryptobusiness for long. Until October, its name was Bioptix, and it was a biotech known for having a veterinary products patent and developing new ways to test for disease.
Riot Blockchain: SEC has initiated an investigation
Riot Blockchain: SEC has initiated an investigation

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.

Riot Blockchain CEO: Cannot comment on SEC subpoena
Riot Blockchain CEO: Cannot comment on SEC subpoena

Riot reported $2.8 million of revenue for the three months ending June 30 and a net loss of $24.4 million, according to a press release issued Wednesday. In the previous quarter, Riot brought in less than $1 million in revenue, according to its filing in May. Year-over-year comparisons are unhelpful since the company only entered the cryptocurrency business in October 2017.

Riot called the second quarter results a "milestone" in the press release.

Most of Riot's revenue came from cryptocurrency mining, which is now fully setup, according to its latest quarterly filing. But the company has recorded a partial write-down in the value of the miners. Bitcoin's price significantly declined in the first six months of the year. Based on that price decline "and the decline in projected cash flows over the life of the miners," Riot said in its latest quarterly report, "the company determined that there were impairment charges."

The company had $1.7 million of cash as of June 30, down from $5.3 million in cash at the end of the first quarter, and down from $41.7 million in December, according to the two most recent quarterly filings.

Riot has $4.9 million worth of cryptocurrency and sold $1.6 million worth of the digital currency. The cryptocurrency on hand increased slightly since last quarter.

Riot has no long term debt. The company owes $1.5 million in August for the purchase of cryptomining machines in February, according to its latest regulatory filing.

Over the last 6 months, Riot spent $20.1 million on purchasing property and equipment and used $9.6 million for operating activities.

"The Company expects to continue to incur losses from operations for the near-term and these losses could be significant…" the latest filing said. "The Company expects the need to raise additional capital to expand our operations and pursue our growth strategies…"

Riot expects to be able to meet its cash needs for at least one year, the filing said.

A CNBC investigation in February found a number of red flags in the company's SEC filings that might make investors leery. The investigation revealed annual meetings that were postponed at the last minute, sales of stock by company insiders soon after the company's name change, dilutive share issuances on favorable terms to large investors, confusing SEC filings and evidence that a major shareholder was selling shares while everyone else was buying.

O'Rourke accused CNBC of publishing "a negative one-sided piece."

"We have made significant inroads in building a diversified portfolio of investments and to begin securing digital assets," O'Rourke said in a letter to shareholders the day the CNBC investigation aired.

CNBC investigates Riot Blockchain
CNBC investigates Riot Blockchain

As bitcoin hit record highs in late December, Riot was making news on a daily basis. The company's stock shot from $8 a share to more than $40 as investors chased the craze of all things crypto.

But Riot had not been in the cryptobusiness for long. Until October, its name was Bioptix, and it was a biotech known for having a veterinary products patent and developing new ways to test for disease.

Riot warned it "may never become profitable," in its latest annual report.

"Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods," the report said.