With notes from Howard Solomon
Leading investors in blockchain investment firm NextBlock Global Ltd. tell IT World Canada they’d do business with CEO and co-founder Alex Tapscott again, despite fines being paid in a settlement with the Ontario Securities Commission (OSC) on Monday.
Tapscott has settled with the OSC over misleading statements in information to potential investors, with Tapscott paying $300,000 in fines personally and NextBlock paying $700,000 in fines plus another $100,000 to cover costs of the investigation into making false representations in a slide deck for potential investors. The deck wrongly said four people in the blockchain industry had agreed to be company advisors.
Tapscott will also shortly publish a letter in a national newspaper “about the impact and consequences of his misconduct,” the settlement says. In addition, he has volunteered to speak to students at three Canadian business schools about his misconduct as part of their ethics courses.
UPDATE: The U.S. Securities and Exchange Commission on Tuesday announced it had settled charges against NextBlock and Tapscott relating to the raising of US$2.4 million from American investors over the same set of facts. NextBlock and Tapscott agreed to a cease-and-desist order, and Tapscott agreed to pay a $25,000 civil penalty.
The OCS investigation arose after an October 2017 Forbes article revealed that some of the advisors listed in a slide deck shown to investors in the summer of 2017 had never agreed to advise the firm. According to the story, the four advisors disputing their involvement included Kathryn Haun, a board member of Coinbase, Vinny Lingham, CEO of Civic and shark on South Africa’s Shark Tank, Dmitry Buterin, founder of BlockGeeks and the father of Ethereum creator Vitalik Buterin, and Karen Gifford, a special advisor for global regulatory affairs at Ripple.
In making the settlement Tapscott and NextBlock agreed the inclusion of that slide was untrue and misleading, violating the Ontario Securities Act.
In a brief interview following a hearing at the OSC in Toronto, Tapscott wouldn’t say how the misconduct occurred.
“I still believe blockchain is foundational to the next era of human progress and I am committed to playing my part,” he said. “We are happy to be putting this matter behind us. I have learned a lot from this process. I am deeply grateful to our investors for their patience and support, and happy they all prospered.
In agreeing to the settlement the OSC noted Tapscott and NextBlock co-operated with investigators, and that Tapscott had no prior incidents with any Canadian regulator.
However, in his decision Commissioner Tim Moseley said that as a former registered securities salesman Tapscott “ought to have known better.”
According to the settlement agreement Tapscott and NextBlock provided over 100 prospective investors with slide decks describing the company’s business and plans. One of the slides, outlining advisors, listed prominent people in the blockchain space. However, at least one and as many as four hadn’t consented to act as company advisors.
As CEO, the statement of agreed facts says, Tapscott was responsible for the content of decks presented to investors. Ultimately in a first private placement, NextBlock raised about $20 million from 113 accredited investors.
NextBlock wanted to raise more after that, hoping to use some of the funds for a reverse takeover of a publicly-traded firm. However, starting Nov. 1, 2017 Forbes.com published a series of articles alleging there had been misleading facts in investor decks, including denials from four people that they had agreed to be advisors, the plans collapsed. CIBC World Markets Inc. and Canaccord Genuity Group decided to not move forward as lead agents in the second private placement.
NextBlock began closing down. Tapscott returned the initial investment of debenture holders — $20 million — plus an additional $28 million in profit from the investments. He also voluntarily declined the carried interest, or his share of the profits, that would have totalled $3 million.
NextBlock investors happy with Tapscott’s actions
In speaking with three of the top five leading debenture holders of NextBlock, the investors tell IT World Canada they would do business with Tapscott again. Both said the deck listing the disputed advisors was not a factor in making their investment decision. Two investors asked to not be quoted by name for this story.
Michael Decter, CEO of Toronto-based investment firm LDIC Inc., was one of the investors in the first private round. He recalls when plans for a second round and a public offering were pulled as a “dramatic moment.” While he says that accuracy is important in the materials presented to investors, Tapscott “paid a big price in terms of reputation for the mistake that was made.”
Decter recalls seeing the slide deck that listed the disputed investors, but says he didn’t pay much attention to the slide listing the advisers. He had known Tapscott for at least six years, and was familiar with him as a sales professional.
“You really see someone’s charachter, not when things go well, but when they go bad,” Decter says. “Alex Tapscott had a painful lesson early in his career and I would be happy to invest with him again.”
Those comments are echoed by other NextBlock debenture holders.
“He did the right thing to settle. He made a mistake or had a miscommunication with some of the early backers or friends and that was unfortuante,” said one of the private investors. “Once that happens, he acted with great integrity, shutting it down immediately, liquidating assets so he could repay people as quickly as possible.”
None of the debenture holders or investors complained to the OSC about the NextBlock slide deck that either investor was aware of. The investors that IT World Canada spoke with are happy with the outcome.
“I wish all of them panned out so well,” said another debenture holder. “The blockchain and crypto markets crashed shortly after this happened, and we still made out with a profit.”
In agreeing with settling rather than holding a full hearing, OSC Commissioner Moseley said the inclusion of certain people as company advisors was “false.” But he also noted that investors got their money back, plus interest. The terms of the settlement reflect the seriousness of the misconduct, he added.
Moseley also said he did have one hesitation before approving the settlement. It is common in similar cases for the OSC to forbid a person from acting as an executive or director of an Ontario company, he said. However, Moseley said, “even though Mr. Tapscott was a director and officer at the relevant time, his admitted misconduct was not necessarily in his capacity as a director and officer of NextBlock. This is so because an employee could be authorized to make representations on behalf of his or her employer, without having to be a director or officer.
“While an individual in a future similar case might encounter more difficulty avoiding such a ban, I conclude that the sanctions in this case, taken together, fall within a reasonable range. This settlement is in the public interest.”
Moseley also said he recognized that blockchain is an emerging industry and that the fines will send a clear message.