One of the most distinct phenomena at the peak of the Internet bubble in the late 90s was the way that so many otherwise entirely ordinary companies added “dot com” to their names to try to cash in on the frenzy. It now looks as if some companies are attempting moves from the same playbook amidst the current cryptocurrency mania. Companies with no prior connection either to bitcoin or blockchain are adopting names or strategies as a way to try to ride the current wave, even where the companies have little or no experience with the technologies. Regulators noting these developments have started sounding the alarm bell. And in at least one instance, these kinds of developments have led to securities litigation.
One of the headline stories in the business pages over the last few months has been the surging prices for bitcoin and other cryptocurrencies. The surging prices have drawn a host of new ventures seeking to get in the action by conducting initial coin offerings. But it is not only startups that are trying to join the bandwagon. A number of existing companies are also trying to get in on the action. For example, last December, the share price of Long Island Ice Tea soared nearly 300 percent after the company changed its name to Long Blockchain. The shares of the old line industrial company Kodak shot up when it announced its plan to issue a cryptocurrency (although the company’s share price soon came back to earth after the company delayed the coin offering.
These developments have not gone unnoticed by regulators. In a January speech at a law conference, SEC Chair Jay Clayton warned that “The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed-ledger technology.” In the same speech, Clayton joked about a company with no cryptocurrency expertise changing its name to “Blockchain ‘R Us.”
Companies trying to cash in on the current mania for cryptocurrency and blockchain are not only attracting regulatory scrutiny; in at least one instance, a company trying to reposition itself as a blockchain technology company has drawn investor litigation.
Founded in 2000, Bioptix was until last fall in the animal healthcare business developing veterinary products. On October 4, 2017, the company announced that it was merging into a subsidiary in order to change its name to Riot Blockchain, Inc. to pursue a strategy of building and supporting blockchain technologies with primary investments in Bitcoin and Ethereum blockchains. Over the following weeks after the company’s name change, its share price rose from under $8 a share to more than $45 a share.
On February 16, 2018, CNBC published a lengthy article about Riot Blockchain, raising questions about the company’s new blockchain strategy. The article also noted a “number of red flags” in the company’s SEC filings that “might make investors leery.” Among other things, the article noted the following about the filings: “annual meetings that are postponed at the last minute, insider selling soon after the name change, dilutive issuances on favorable terms to large investors, SEC filings that are often Byzantine and, just this week, evidence that a major shareholder was getting out while everyone else was getting in.” The article also raised questions about the relationship between the company and one of its largest investors, and the relationship between the investor and company management.
The CNBC article followed an earlier Denver Post article raising questions about the company’s new blockchain strategy as well as the CEO’s sales of his personal holdings in company shares.
On February 17, 2018, a Riot Blockchain shareholder filed a securities class action lawsuit in the District of New Jersey against the company and certain of its offices. A copy of the New Jersey complaint can be found here. A different plaintiffs’ law firm has filed or plans to file a separate complaint in the District of Colorado (here).
The Colorado complaint alleges that the defendants made false or misleading statements or failed to disclose that: “Riot had no meaningful experience in the cryptocurrency business and only minimal investments in cryptocurrency products; (ii) the Company changed its name to Riot Blockchain, Inc. as part of a scheme to capitalize on public interest in cryptocurrency products, thereby driving up the Company’s stock price and enriching inside shareholders; and (iii) as a result of the foregoing Riot’s company statements were materially false and misleading at all relevant times.” The complaint refers to the sale by the company’s CEO of company shares in December, after the company’s name change and after its share price surged. The complaint also alleges that after CNBC published the article critical of the company, the company’s share price sustained a “precipitous decline.”
The lawsuits have only just been filed and it remains to be seen whether or not the claims will prove to be meritorious. The company’s CEO has come out defending the company’s action and his sales of a portion of his holdings of the company’s stock.
While the entire story has yet to be told on this lawsuit and so many of the lessons to be learned may have to wait until a later date for assessment, there is a part of this present situation that could trouble observers now. That is, from the time the company changed its name and its strategy, Riot Blockchain has been an entirely different company. Riot Blockchain is not going to be the only company to undergo this kind of transformation. Undoubtedly other companies will also try to take advantage of the market interest in cyptocurrencies and blockchain technology and try position themselves as players in these industries.
These possibilities post a particular challenge for D&O insurers. Insurers are very wary of cyptocurrencies and companies that are seeking to position themselves around the blockchain technology. Most insurers right now are trying to stay far away from this entire sector. But the sequence of events at what is now Riot Blockchain shows that in the current environment existing companies that have nothing to do with cyptocurrencies or blockchain could completely change their identity and strategy – and commercial risks that previously might have seemed perfectly acceptable could become an entirely different kind of risk.
The price volatility for cryptocurrencies so far in the New Year presents a different environment than was the case at the end of the year last year, where the prices of bitcoin and other cryptocurrencies were soaring. The changed price environment may deter a lot of the excesses that arose at year end involving cryptocurrencies and ICOs.
However, there may still be enough remaining interest in the technology that other companies may yet attempt an approach like that Riot Blockchain followed – that is, there could be other companies, perhaps many other companies, that try to change their name or strategy to try to cash in on the investor interest in the technologies. The possibilities that traditional companies could try to reposition themselves this ways represents a particular challenge for D&O insurers. As the sequence involving Riot Blockchain shows, among the risks that companies pursuing this kind of approach may be taking on is the possibility of claim by shareholders.