Greater Dallas Firm Allegedly Sold Unregistered Securities, Pooh-Poohed Qualification Criteria — And Accepted Bitcoin Without Disclosing Risks

“Far from verifying that purchasers of the company’s investments are accredited, [Balanced Energy President Kirk] Johnson, according to the order, said ‘we don’t do any verification’ and ‘we’re not the paperwork police,'” — Texas State Securities Board, March 11, 2014

Balanced Energy LLC, an oil-and-gas firm based in the Dallas-Fort Worth suburb of Southlake, is not an HYIP in the classic sense of the term. But the company’s experience could presage danger to HYIP scammers who seek to hitch their wagons to Bitcoin and cherry-pick Bitcoin users.

In an emergency cease-and-desist order dated March 10, the Texas State Securities Board has accused Balanced Energy of accepting payment through Bitcoin without disclosing the risk of using the digital currency.

“Balanced Energy will convert some or all of the payments it receives through Bitcoin to traditional currency and use the money to pay for its business operations,” the board said, referring to its order.

“Balanced Energy has failed to disclose to investors the risks in using Bitcoin to purchase working interests in wells, according to the order,” the board continued. “The price of digital currency is subject to extreme swings, which could affect the amount of money available for business operations.”

Regulators conceivably could attack HYIPs accepting Bitcoin under the same theory, adding another layer of risk to the already insidious “opportunities.”

Balanced Energy also sold unregistered securities and solicited unaccredited investors, the board alleged.

Again the experience of Balanced Energy could signal bad news for HYIP scammers.

“Far from verifying that purchasers of the company’s investments are accredited, [Balanced Energy President Kirk] Johnson, according to the order, said ‘we don’t do any verification’ and ‘we’re not the paperwork police,'” the board alleged.

From a statement by the board (italics added):

The working interests are not registered with the State Securities Board and no permit has been granted for their sale in Texas. Rule 506 of Regulation D under the federal Securities Act of 1933 does allow an issuer to solicit and sell certain securities without first complying with state registration requires, but only to accredited investors. The Securities and Exchange Commission defines individual accredited investors as persons whose net worth is at least $1 million – excluding their primary residence – or who make at least $200,000 a year.

The issuer of a such an offering must also take reasonable steps to verify an investor’s accredited status.

HYIP schemes — always a den of criminality — increasingly may be trying to tie themselves to Bitcoin and appear even to be launching Bitcoin-themed reload scams targeting Bitcoin users who lost money at Mt. Gox. Soliciting investors regardless of their financial standing is one of the oldest tricks in the HYIP scammer’s playbook.

Consumers could be left holding the bag if a scheme goes south.

“Although digital currencies such as Bitcoin are often touted as a sophisticated, online alternative to traditional currencies, investors should realize these currencies are not tangible, they are not issued by a government, and are not currently subject to traditional regulation or monetary policy,” Texas Securities Commissioner John Morgan said last month.

Here are just two of the points made in an Investor Warning by the Texas board last month (italics added)

Digital currencies may provide promoters with a significant degree of anonymity.  Unscrupulous promoters may be able to exploit the anonymous nature of certain digital currencies to conceal their true identity and assist in the concealment and laundering of the proceeds of a fraudulent investment offering.

Securities offerings that incorporate digital currencies may be highly dependent upon their growth and acceptance in retail and commercial marketplaces.  Also, any change in consumer confidence, user demographic or governmental regulation, or the introduction of new and competing forms of digital currencies, may negatively affect the liquidity or value of such securities offerings.

Applied to the HYIP sphere, the message may be that you can get in with Bitcoin — but you might not be able to get out.

And a scammer, of course, could simply relieve you of your Bitcoins by plying you with offers of dazzling returns — and then simply hightail it to the next scam to do it all over again.