SEC warns public vs investing in ‘cloud mining contracts’

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Securities and Exchange Commission

THE Securities and Exchange Commission (SEC) issued an advisory against investing in securities that promise guaranteed profits by banking on the craze surrounding cryptocurrency.

In a notice uploaded on its website, the Commission warned that certain local and foreign companies are enticing the public through social media platform or in their own independent websites to invest in so-called cloud mining contracts.

Cloud mining is a process of acquiring cryptocurrency through the utilization of shared mining equipment located in an off-site or a remote datacenter, with the purchase of equipment being funded by investors who avail of cloud mining contracts.

“(T)he public is hereby advised to stop investing in these kinds of unregistered investment activity and to take the necessary precautions in dealing with these cloud mining companies,” the SEC said.

These companies require registration of an online account in a website or a mobile platform; the payment of an initial fee or investment either in fiat currency or cryptocurrency to avail of their offered mining contracts; promises to pay the investor daily or weekly mining proceeds directly to the latter’s cryptocurrency wallet or fund account; and offer affiliate commissions for every recruit that registers and invests using the referring investor’s link.

The Securities Regulation Code (SRC) defines an investment contract as “a contract, transaction or scheme, whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others.”

Applying the Howey Test — a test created by the Supreme Court to determine whether certain transactions qualify as investment contracts — the SEC classified a cloud mining contract as an investment contract falling within the purview of the term “securities” as defined by law since there is investment of money, an investment in a common enterprise, expectation of profits and the income is generated from the efforts of others

Since the scheme involves the sale of securities to the public, the SRC requires the securities to be registered and that the corporation and its agents secure the appropriate license and/or permit to sell them.

Likewise, those who engage in the sale or convince people to invest in cloud mining contracts without the necessary license or authority from the SEC can be prosecuted and be held criminally liable under the SRC, and penalized with a maximum penalty of 21 years of imprisonment or both.

The SEC came out with an advisory at the start of the year warning the public against investing in unregistered securities such as initial coin offerings.

The Bangko Sentral ng Pilipinas (BSP) has also urged the public to exercise caution when investing in cryptocurrencies, citing its potential to be used in illicit activities such as money laundering and terrorist financing.

Virtual currency transactions in the Philippines reached a monthly average of over $8.8 million per month, BSP data showed. — Krista Angela M. Montealegre