Securities regulators are investigating a company’s $50 million cryptocurrency sale, an executive with the firm said, and people familiar with the probe said it includes looking at whether a prominent bitcoin entrepreneur broke the law by getting involved with the company’s fundraising.
The entrepreneur, Erik Voorhees, is chief executive of ShapeShift AG, a digital-asset exchange that suspected criminals have used to launder millions of dollars in allegedly ill-gotten gains, The Wall Street Journal reported earlier this year. Law-enforcement officials in the U.S. and abroad have looked at ShapeShift’s role in processing assets in several criminal cases, people involved in those investigations told the Journal.
Now, the Securities and Exchange Commission is probing another company that has been affiliated with Mr. Voorhees, Salt Lending Holdings Inc. The company, which loans money to people using their cryptocurrency as collateral, received a subpoena from the SEC in February seeking records related to a $50 million digital-token sale it held last year, the people familiar with the matter said.
Among other issues, regulators are looking at whether Salt’s token sale should have been registered with the SEC as a securities offering; how Salt insiders received tokens; how token proceeds were used; and whether raising money while Mr. Voorhees served on Salt’s board violated a 2014 SEC settlement that banned Mr. Voorhees from such fundraising, according to the people familiar with the probe. An SEC spokesman declined to comment.
The Salt probe comes amid a wave of SEC investigations into cryptocurrency companies. Regulators say many of the deals violate investor-protection laws because they don’t provide buyers with required financial information and risk disclosures.
Mr. Voorhees is a critic of regulation who referred to government-backed currencies as “scams” in a recent interview posted on the YouTube channel NBTV. In an interview with the Journal last summer he said “this whole narrative that the government is out to protect people is total bullshit.”
He has said exchanges such as ShapeShift, don’t have to follow federal laws requiring financial companies to know who their clients are and to file suspicious-activity reports with the government when potential money laundering is discovered. The U.S. Treasury Department says such exchanges must follow anti-money laundering rules, though the law in the area remains largely untested.
In addition to the SEC probe, Salt faces a private lawsuit filed Tuesday in Colorado state court by a former Salt financial officer who alleged it gave favorable loan terms to some executives and their families and lost $4 million in cryptocurrency in a February hack. The suit also mentions that Salt is under SEC investigation.
Brian Klein, an attorney for Mr. Voorhees, declined to comment. Mr. Voorhees wasn’t named as a defendant in the former employee’s lawsuit.
Jennifer Nealson, a Salt executive, confirmed that the company received an SEC subpoena in early 2018, around the time the SEC issued a wave of investigative demands to startups in the nascent industry. Mr. Voorhees was an “early contributor” to Salt, but “no longer serves in any formal capacity,” Ms. Nealson said in an email.
“Over the past year, Salt has transformed from an early stage start-up to one of the leading cryptocurrency-backed financial services companies in the world,” said Ms. Nealson who added that the company has policies to ensure compliance with all state and federal laws.
Mr. Voorhees has been under SEC scrutiny before. After the agency accused him of conducting an illegal, public stock offering for an internet gambling company, Mr. Voorhees in 2014 reached a settlement requiring he pay about $50,000 in fines and disgorgement. In the settlement, he neither admitted to nor denied the SEC’s claims. The sanction had the effect of barring his firms from raising money in private markets—and being a director for companies doing such fundraising—where most investor-protection rules are absent, according to legal experts.
“A provision in the settlement makes him a so-called ‘bad actor’ unable to rely on an SEC safe harbor for private, unregulated stock sales,” said Keith Higgins, chairman of the securities and governance practice at Ropes & Gray LLP and a former SEC division director.
Salt conducted such a private offering in August 2017, and listed Mr. Voorhees as a director on an SEC filing five days before the first sale. He was also named as a Salt director on the company’s website and on promotional materials for investors that the Journal reviewed.
Salt amended the SEC disclosure in November, saying it raised $1.5 million, and didn’t mention Mr. Voorhees.
Securities lawyers said the SEC could seek civil penalties against Salt if it finds Mr. Voorhees’s involvement barred the company from raising money privately.
ShapeShift referred questions to a spokesman who said he was working for Mr. Voorhees. The spokesman said Mr. Voorhees isn’t banned from private fundraising. He declined to explain Mr. Voorhees’s reasoning, and added that Mr. Voorhees “has abided by the terms of his settlement with the SEC.”
A Journal investigation earlier this year found ShapeShift accepted suspected criminal proceeds and exchanged proceeds for a cryptocurrency that can’t be traced by law enforcement, potentially allowing criminals to avoid detection. ShapeShift has since banned suspicious addresses the Journal identified from using the exchange and announced in September that users would be required to submit identification to trade. The company continued to allow anonymous transactions until early November, but now requires users to identify themselves.
From its founding in 2016, Salt has been closely tied to ShapeShift. Mr. Voorhees has played a leadership role at both firms. Two other ShapeShift executives were listed in Salt investor materials as company advisers.
Salt’s strategy was to give cryptocurrency investors a way to access real cash without having to sell their digital holdings, an enticing prospect at a time when cryptocurrency prices were skyrocketing.
Salt in July 2017 began selling its own token that allowed holders to access its loans—around the time an SEC report warned the regulator would police the red-hot crypto market.
Since late last year, cryptocurrency prices have plummeted, lowering the value of the collateral Salt lent money against.
The company said in an advertising brochure that its tokens weren’t securities and “are not for speculative investment.”
To show the SEC that its token wasn’t an investment, Salt allowed coin holders to sell the token back to the company to cover their principal and interest payments, the Colorado lawsuit alleged. The arrangement was a huge money loser because Salt bought the coin back at $27.50, even when the token traded on exchanges for less than $1, the legal complaint said.
Ms. Nealson, of Salt, said the company no longer redeems its token, which she called a “membership unit,” for $27.50. That exchange rate was a “promotional offer,” she said.
The person who filed the suit, David Lechner, was a top financial officer at Salt until June. He left after questioning how funds were spent and the special deals given to insiders, the complaint states.
An attorney for Mr. Lechner didn’t respond to a request for comment.