On July 11, 2018, in an emergency cease and desist order, the Texas securities commissioner took action against several individuals and affiliated companies based in Utah to halt the offering of unregistered cryptocurrency mining investments to Texas residents. The order alleges numerous violations of the registration and antifraud provisions of the Texas Securities Act.

In marking the offering, the respondents allegedly promised an “annual rate of interest range from 180 percent to 250 percent.” One respondent also allegedly touted himself as “up 500% on [his] investment in 7 weeks” and “his uncle is up 4,000% in 10 weeks!” Such outsized returns on investment in short periods of time are typically red flags to securities regulators.

The order is also notable because it alleges that the respondents intentionally failed to provide investors with basic information about themselves and warn potential investors of various risks associated with cryptocurrency and cryptocurrency mining. These risks included that (1) governments may adopt legislation or regulation that may negatively impact the use, transfer, exchange or price of cryptocurrencies; (2) cryptocurrencies are volatile and the price of cryptocurrency relative to fiat currency may decrease over a short period of time, resulting in significant loss to purchasers or traders; (3) a system or technical failure, or deficient source code, may negatively impact the ability to exchange cryptocurrencies and their associated trading prices; (4) a hacking incident or malicious attack may impact the price of cryptocurrencies; and (5) cryptocurrencies compete with other cryptocurrencies and this competition may negative impact the price of a specific cryptocurrency.

Texas, like many states, has been very active in policing potential violations of state securities laws. Authority to pursue registration and antifraud cases under so-called blue sky statutes is not preempted by federal law, and the states often act independently of federal regulators, like the Securities and Exchange Commission. As this case demonstrates, many states also have a power that the SEC lacks—the power to proceed on an ex parte basis to issue a cease and desist order without the need to seek prior judicial approval. Instead, as this case also demonstrates, after the order is issued a respondent has the ability to challenge the allegations at a subsequent hearing, but prior to that hearing the respondent remains enjoined from engaging in the conduct that is the basis of the order.