SEC Shouldn't Ignore Sketchy IPOs in Crypto Crackdown

(Bloomberg Gadfly) -- Two weeks ago, Bitzumi Inc., which describes itself as a "vertically integrated bitcoin exchange" of online media and crypto-related offerings, began soliciting investors on its website.

Bitzumi has two executives, only one of whom works full time; the CFO puts in 10 hours a week. Its CEO, Scot Cohen, appears to have no prior media or cryptocurrency experience. Cohen, among other roles, is also the executive chairman of a company that makes a handheld device, the BolaWrap 100, which shoots a kevlar rope to demobilize perpetrators, Batman-style. A call to the number listed on Bitzumi's financial filing was not returned. Two other individuals listed on Bitzumi's website under management said they work for an outside company that has been contracted by Bitzumi to create content for its website.

Bitzumi, on its website, says it was co-founded by James Altucher, a hedge fund manager whose video about bitcoin has been blasted though banner ads around the internet. But Altucher calls himself  "just an investor and a supporter of the company." Bitzumi's filings says it entered into a "co-founder and advisory agreement" with Altucher in January in exchange for shares. Bitzumi is looking to raise $10 million from investors. That would give the company, which according to it latest financials has never had a single dollar of sales, a fully diluted valuation of nearly $300 million.

I bring this up because the Securities and Exchange Commission this week reportedly launched a crackdown on cryptocurrency-related offerings, sending dozens of subpoenas to companies and advisers connected to initial coin offerings. There is no indication that Bitzumi is on that list. In fact, its offering appears to have the SEC's blessing. That's because Bitzumi's stock deal is technically a Reg A+ IPO, a type of offering that the SEC has been trying to promote, and not an ICO, a type of offering that SEC has repeatedly raised concerns about.

The crackdown on ICOs makes sense. They have raised just more than $3 billion in just the first two months of this year, according to CoinDesk, on top $5 billion last year. The sponsors of ICOs often do not register their deals with the SEC. The virtual coins are part currency and part investment that derive their value from services that have often not yet been created. A professor at MIT estimates that as much as $317 million has been lost in the ICO market to scams and swindlers. So it makes sense that the SEC would want to get a handle on this market to protect investors.

That should go for other markets as well, but that doesn't seem to be the case. While SEC Chairman Jay Clayton has been warning about ICOs and other cyptocurrency-related investments, he's also been trying to boost the IPO market. The number of IPOs are down in the past few years, and Clayton sees that as a product of overregulation and a reason the economy is not as dynamic as it used to be. His solution in part is to promote Reg A+ deals, which allow smaller firms to do stock deals with less disclosure and looser regulations. 

Yet Reg A+ deals don't seem to be a better bet than ICOs. In fact, they seem worse so far. Of the 10 Reg A+ deals that have been launched in a little over the past two years, only one has gone up in price. The rest have all lost value, some as much as 75 percent. And it's a market that contains some questionable operators. Clayton has said that his first priority is protecting Mom and Pop 401(k)s. But I would imagine that mom and pop are more likely to wander into questionable IPOs than unfamiliar ICOs. The SEC should be in the business of protecting investors, but it should do it everywhere and not just in markets that already scream weird.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

To contact the author of this story: Stephen Gandel in New York at sgandel2@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.

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