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Attorneys offered sharply different accounts of TEXITcoin on Monday as a Texas administrative hearing began over allegations that the cryptocurrency operation sold unregistered securities through a multilevel marketing scheme and misled potential investors.
The Texas State Securities Board issued an emergency cease-and-desist order on Feb. 11 against TEXITcoin, its mining partner MineTXC, Blockchain Mint and founder Robert “Bobby” Gray. The order accused the respondents of illegally and fraudulently selling cryptocurrency mining packages to Texans. Gray and TEXITcoin deny the allegations.
The hearing before the State Office of Administrative Hearings will determine whether the emergency order should remain in effect, be modified or be set aside.
Jeramy Heintz, an attorney for the Securities Board, told the administrative law judge that the central issue is not whether TEXITcoin itself is a security. Instead, regulators are targeting the crypto mining packages that customers purchased to receive daily distributions of the cryptocurrency, known as TXC.
“This is a case about economic reality over labels,” Heintz said. Although the hearing will involve terms such as blockchain, hash power, mining pools and cryptocurrency, he said, the legal question is more straightforward: “What was really being sold?”
According to the February order, MineTXC offered packages ranging from $995 to $8,955. Gray called the packages “seats on the rocketship,” as he proposed the TXC coins would increase in value and make the purchasers wealthy.
The Securities Board alleged purchasers never received or controlled mining equipment.
They did not select mining sites, negotiate electricity contracts, install or repair machines, or determine how mining rewards would be distributed.
“Purchasers supplied the capital, and respondents supplied and managed the enterprise,” Heintz said.
Regulators contend that arrangement made the packages investment contracts, and therefore, securities, because customers expected to benefit from the respondents’ continuing management of the mining operation and expansion of the TEXITcoin ecosystem.
Heintz pointed to promotional language telling purchasers they had a “seat on the rocket ship” and could “sit back and enjoy the ride.” He said those statements presented the packages as passive investments rather than purchases that required customers to operate their own mining businesses.
The February order also characterized the sales operation as a multilevel marketing scheme. It alleged TEXITcoin and MineTXC recruited participants to sell mining packages and bring in additional purchasers in exchange for bonuses and commissions.
Under what the order described as a binary compensation structure, participants formed two teams of recruits. Sales agents allegedly could earn $1,000 when each team accumulated three points, $2,000 for six points and $3,000 for nine points. Weekly commissions were capped at $3,000 and could reportedly be paid in cryptocurrency, additional mining power or the USDC stablecoin.
The order alleged the operation used social media, online videos, radio advertisements, billboards and sponsorships to promote the packages and recruit customers in Texas, elsewhere in the United States and internationally.
MineTXC’s website claimed the operation had raised more than $147 million and paid approximately $65 million in commissions.
Heintz also argued that purchasers did not receive complete and accurate information before committing their money.
Regulators further accused the respondents of promoting Gray’s business experience without adequately disclosing that his former company, Mulligan Mint, entered Chapter 11 bankruptcy in 2013. The case was later converted to a Chapter 7 liquidation.
Avi Perry, an attorney representing Gray and TEXITcoin, disputed both the fraud allegations and the characterization of the mining packages as securities.
“This is just not a real fraud case,” Perry said. “There are lies and there’s stolen money. And the sad reality is that fraud is everywhere in crypto. That isn’t even close to this case.”
Perry said the order does not identify a specific false statement by Gray or accuse him of stealing or misappropriating money. He said purchasers received all the TXC and commission payments they were promised.
Perry also argued that Gray repeatedly warned purchasers that cryptocurrency was speculative, offered no guaranteed returns and told people not to spend more than they could afford to lose.
He said Gray publicly discussed the Mulligan Mint bankruptcy and other problems as they arose.
The state’s fraud case is based largely on alleged omissions. Perry argued Gray had no legal duty to disclose the information cited by regulators and maintained that much of it was disclosed anyway.
Perry also rejected the state’s emphasis on multilevel marketing, saying the commissions were disclosed and paid. He argued the recruitment program was irrelevant to whether the underlying mining packages were securities.
“There is no MLM that caps you at $9,000,” Perry said. “The commissions were disclosed, and everyone was paid.”
A multilevel marketing structure is not necessarily illegal by itself. The legal questions in the case include whether TEXITcoin’s packages were unregistered securities and whether their sale involved fraud or materially misleading representations.
Perry compared the packages to an advance purchase of gold from a mining company. Customers received a digital commodity, he said, but no ownership interest in MineTXC, claim on its property or right to its profits.
“You buy a package, you get TXC,” Perry said. “Nothing more, nothing less.”
The Securities Board is asking the judge to uphold the order, find that the respondents violated state securities law and authorize refunds to purchasers. TEXITcoin and Gray are asking the judge to reject the fraud allegations and set the emergency order aside.
The TEXITcoin hearing is scheduled for four days through Thursday, Aug. 20.
