On May 13, 2019, the Ontario Securities Commission approved a settlement agreement in the matter of NextBlock Global Limited (“NextBlock”) and its Co-Founder and CEO, Alex Tapscott. The settlement agreement acknowledged that Mr. Tapscott and NextBlock violated subsection 122(1)(b) of the Securities Act by making false representations in an offering memorandum used to solicit investors.
Background
NextBlock was launched in 2017, and raised $20 million via convertible debentures – a type of debt instrument – to invest in blockchain companies. In order to solicit funds from investors, Mr. Tapscott and other NextBlock principals claimed that as many as four prominent individuals in the blockchain industry were serving as advisors to the firm. They did so in a slide deck provided to potential investors. However, it turned out that these advisors had not agreed to act as its advisors and had not consented to be included in the investor slide decks distributed in the initial raise.
Following the initial $20 million raise, NextBlock began to take steps to complete a reverse take-over and a second private placement; however, before those steps were completed, the false representation regarding advisors became known. NextBlock and Mr. Tapscott voluntarily initiated wind-up proceedings and liquidated existing digital asset holdings. All the investors in the initial private placement had their investment returned to them, along with profits from investments (approximately 140% as of March 2019). Mr. Tapscott has foregone approximately $3 million in carried interest and has elected not to receive a salary from the relevant period.
Settlement
The terms of the settlement were as follows:
- NextBlock is to pay an administrative penalty of $700,000, and costs of $100,000.
- Mr. Tapscott is to pay an administrative penalty of $300,000.
- Mr. Tapscott has written an open letter about the consequences of his misconduct, published in a national newspaper.
- Mr. Tapscott has volunteered to deliver presentations consistent with his letter, to students at three Canadian business schools within the next 18 months.
The Panel at the settlement hearing held that this negotiated result fell within the range of reasonable outcomes, and that it would be in the public interest to approve the settlement.
The Panel respected the negotiation process and reasoned that the settlement avoids the extra costs associated with a contested hearing. The Chair explained that the terms of the settlement properly reflect the principles applicable to the sanctions, including recognition of the seriousness of the misconduct, and importance of fostering investor protection and confidence in the capital markets.
While it is common for officers or directors implicated in securities violations to be prohibited from continuing to act as a director or officer; the Panel chose not to enforce such a ban. The Panel reasoned that Mr. Tapscott’s misconduct was “not necessarily in his capacity as a director or officer of NextBlock” because an employee could be authorized to make representations on behalf of their employer without having to be a director or officer. However, the Panel did warn that future similar cases may encounter more difficulty avoiding such a ban.
Takeaways for Business
This case is an interesting one insofar as at it demonstrates the applicability of securities laws to the blockchain industry, even though this case did not itself concern the applicability of securities regulations to token or coin offers. Those in the blockchain space should ensure they have proper securities advice whether or not they are raising funds through the issuance of tokens or coins.
This case also emphasizes the importance of ensuring that slide decks, and other presentation materials, are accurate. These materials are often overlooked as they are generally viewed as being more casual. However, this case signals that any misrepresentation in a slide deck will be considered equally as serious as any other misrepresentation to potential investors.
The authors thank Noah Walters, a summer student in our Toronto office, who contributed to this article.
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