Blockchain company and CEO to pay over $1M for misleading investors
The OSC has approved a settlement agreement with NextBlock Global Limited (“NextBlock”) and its founder and CEO, Alex Tapscott, in connection with misleading statements made to prospective investors in 2017.
Misrepresentations in investor slide decks
NextBlock, of which Tapscott was a co-founder, was formed in 2017 to invest in blockchain companies and other digital assets. NextBlock and Tapscott were alleged to have made misleading statements in offering memoranda, in the form of slide decks, provided to more than 100 prospective investors in a private placement that raised approximately $20 million over a two-month period in June and July 2017. As CEO at the time, Tapscott led this fundraising effort. The slide decks were the only materials provided to investors.
The slide decks positioned prominent blockchain figures as NextBlock’s advisors. The OSC alleged that, in reality, these individuals had not agreed to act as advisors and had not consented to be included on the slide decks. One individual included in the slide decks had never been approached to act for NextBlock in any capacity.
In November 2017, while a second fundraising effort was underway, a series of articles on Forbes.com disclosed that NextBlock and Tapscott had made misrepresentations to investors. Following the disclosure of the alleged misrepresentations, Nextblock cancelled its second fundraising round and abandoned its plan to publicly list the company on the Toronto Stock Exchange. NextBlock then voluntarily initiated court proceedings in Ontario to wind up the company.
Settlements with the OSC and SEC
The OSC alleged that the misleading statements in the investor slide decks deprived the investors of the opportunity to make fully informed decisions and undermined confidence in Ontario’s capital markets. Jeff Kehoe, Director of Enforcement at the OSC, was quoted in an OSC news release as stating “We will not tolerate market participants who play fast and loose with the facts when providing offering memoranda to prospective investors, including marketing decks.”
As part of the settlement, Nextblock and Tapscott admitted that the representation that certain prominent figures in the blockchain community were advisors to NextBlock was untrue and misleading. NextBlock and Tapscott admitted that these statements were contrary to the Ontario Securities Act and admitted they acted in a manner contrary to the public interest.
NextBlock agreed to pay an administrative penalty to the OSC of $700,000 plus $100,000 towards the cost of the OSC’s investigation. Tapscott will pay an administrative penalty to the OSC of $300,000. Tapscott has also agreed to perform community service by delivering ethics presentations to students at Canadian business schools, which highlight the importance of complying with Ontario securities law, and will publish an open letter about the impact and consequences of his misconduct.
In a parallel settlement at the SEC, Tapscott agreed to pay a monetary penalty of $25,000 to the SEC. NextBlock and Tapscott also agreed to cease and desist from committing or causing any violations of US securities laws.
The brief period between NextBlock’s significant capital raise and its winding up represented an extraordinary fall from grace, set against the backdrop of furious activity and excitement in the cryptocurrency space. The company’s story represents another cautionary tale about the severe consequences of misleading investors and the perils for new investors in the often over-exuberant market surrounding new technologies.