Early SatoshiDICE investor. Photographer: Yoshikazu Tsuno/AFP/Getty Images
Early SatoshiDICE investor. Photographer: Yoshikazu Tsuno/AFP/Getty Images

Today the Securities and Exchange Commission shut down a bitcoin investing scam that, as bitcoin investing scams go, is disappointingly un-scammy. A very bitcoiny guy named Erik Voorhees1 started some very bitcoiny companies called SatoshiDICE and FeedZeBirds,2 and he sold shares in those companies, for bitcoins, over the internet. He called these sales initial public offerings, and published homemade prospectuses for them on the Internet,3 but he forgot to register them with the SEC.

The SEC does not like it when you do that. Today it made him disgorge $15,000 in profits and pay a $35,000 fine.

That's relatively small potatoes because, from the SEC order, he doesn't seem to be a particularly bad guy. Voorhees initially IPOed SatoshiDICE in August 2012, ultimately selling 13 percent of the company for 50,600 bitcoins worth about $700,000.4 In July 2013, Voorhees sold SatoshiDICE for $12.4 million, and after announcing the pending sale went and bought back all of those shares for 45,500 bitcoins worth about $3.8 million. So his investors, in the aggregate, made a 400+ percent return in less than a year.

Wait no did I do that right? Or did they lose 10 percent in less than a year? I mean, in aggregate, they invested 50,600 bitcoins and got back 45,500, for about a 10 percent loss in bitcoins. But also, in aggregate, they invested 700,000 American dollars and got back 3,800,000 of them, for about a 437 percent return in American dollars. So I guess they're not complaining? Or maybe they are, I have no idea. I gather that complaining is a thing that bitcoin investors sometimes do.

The weirder situation is FeedZeBirds, which has not had a liquidity event. On May 24, 2012, Voorhees sold 30,000 shares (30 percent) of FeedZeBirds for 0.08667 bitcoins per share, raising a total of 2,600 bitcoins, worth about $15,000 at the time5

FeedZeBirds was listed on the Global Bitcoin Stock Exchange, which was run by a man with the confidence-inspiring online nickname "Nefario." The SEC drily points out that the GBSE "ceased operations" in October 2012. From my casual perusal, FeedZeBirds does not seem like a particularly vibrant business these days either.

What happens when you buy stock in a company that ceases operations and de-lists? Well, you're sad, mostly; after all, you were an equity investor and you took the equity risk. But what happens when you buy stock in an illegally unregistered offering of a company that ceases operations and de-lists? You sue, come on, the answer is always that you sue.6

And the law on this is really simple and clear: If someone sells you a security in an illegally unregistered offering, you are entitled "to recover the consideration paid for such security with interest thereon."7 So the people who bought those 30,000 shares of FeedZeBirds are entitled to get their ...

Wait, what are they entitled to get back? One might think that they paid about $15,000 for their FeedZeBirds shares, so they should get back $15,000, with interest. This seems to be the SEC's implicit math, too; it required Voorhees to disgorge $15,000, plus $843.98 of interest, in addition to his $35,000 fine.

But why would FeedZeBirds investors want grubby fiat dollars back? They didn't pay 15,000 American dollars for their FeedZeBirds shares. They paid 2,600 glorious bitcoins for those shares.8 They should demand back those 2,600 bitcoins -- worth about $1.75 million today9 -- plus interest.

I have no idea whether they'd get them back.10 A few casual conversations with securities lawyers did not unearth any bitcoin-disgorgement expertise. But if regulators are going to go after bitcoin scams, eventually someone is going to have to answer this question: If you get scammed out of bitcoins, are you only entitled to the dollar value of the bitcoins at the time you were scammed out of them? Or can you actually get your bitcoins back? You know, like as if they were actually currency?

1 He's "a prominent bitcoin entrepreneur and an active promoter of the virtual currency and libertarian politics online," and lives in Panama.

2 FeedZeBirds was (is?) a "Bitcoin Twitter advertising platform"; SatoshiDICE "purports to be a gambling website that takes bets and pays out winnings in bitcoins."

3 The SEC does not link to these, and they seem to have disappeared from the Internet, which I bet is a real loss.

4 That's an initial offering in August 2012 through January 2013 of 10 million shares (10 percent of the company) for 0.0032 to 0.0037 bitcoins each:

The first SatoshiDICE offering raised 34,500 bitcoins. At the time of the offering, 34,500 bitcoins were worth approximately $371,910.

And a second offering in February of 3 million shares for 0.0044 to 0.0062 bitcoins each, which raised 16,100 bitcoins worth approximately $337,827.

5 I actually see them worth about $13,000, based on a $5.12 dollar-bitcoin exchange rate from Bloomberg function XBTUSD BGN Curncy <go>. But the SEC says "At the time of the offering, 2,600 bitcoins were worth approximately $15,000." Close enough.

6 In particular my previous answer was obviously false; if you buy stock in a perfectly legal company that then shuts down of course you sue them, too. You sue everyone, always, this is America. The rules might be different in Bitcoinia however.

7 That's section 12(a) of the Securities Act of 1933, for sales without a registration statement in violation of section 5 of the act. Here is a discussion of the rules. Here, randomly, is a "rescission offer" by an issuer that accidentally forgot to register a sale of shares and had to offer to buy them all back.

8 Again, in aggregate.

9 I see $672.74 per bitcoin today on XBTUSD BGN Curncy <go>.

10 I wouldn't bet on it. But I'm putting my skepticism down here in a footnote because it is not strongly held.

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.