The Financial Sector Conduct Authority (FSCA), the body that regulates and supervises the conduct of financial institutions, is investigating whether listed company Nutritional Holdings’s attempt to launch a cryptocurrency breached any laws or regulations.
The penny stock company attempted to raise money for its new cannabis supplement business through asking shareholders to invest in SA’s “first cryptocannabis currency”, a digital currency called Cannacrypt.
Cryptocurrencies are digital tokens that are not issued by central banks and are stored electronically. Bitcoin and ethereum are among the most well-known globally traded cryptocurrencies.
Nutritional, which has R18m in debt and lost money for six consecutive years, sells porridge and maize products to schools and prisons. It needs to raise capital to expand its Lesotho-based cannabis operations under its Ukusekela division.
The company sent a letter to shareholders on March 25 offering exponential returns in exchange for investing in its coins. The letter said that a R20,000 coin investment would be worth R2.4m by 2030.
Designing and selling a cryptocurrency is not unlawful or directly in breach of JSE listing rules, though digital currencies are unregulated.
However, the matter is being investigated.
Divisional executive for enforcement at the FSCA Brandon Topham said: “The matter is being investigated by the JSE and the FSCA for potential breaches of relevant laws or listing rules.”
The regulator was looking into the cryptocurrency offering. “It must be remembered that crypto assets are not necessarily illegal,” he said.
“The devil is in the detail and that is what is currently being investigated. The JSE is primarily involved, but we have also opened a file and will largely rely on information provided by the JSE,” Topham said.
It said it was unlikely that Nutritional was selling any digital currency, “while all the questions are being resolved”. Regulators wanted to understand what was intended by the sale, he said.
Topham said digital currencies were legal and regulators did not want to stifle innovation.
“We are very conscious of the need to embrace new technologies and be open to new developments to maintain a place as a leading financial sector in the world economy.
“However, we are always wary of protecting the public from exploitation of any kind, so we will ensure that the law is adhered to.”
The shareholder letter included lines that were not comprehensible such as: In the first of its kind globally backed by tangible blue chip assets, Ukusekela, in its quest to create an exponential secondary income stream and triple-digit growth for shareholders through cryptocurrency via the launch through cannabis coin bodes well for shareholders (sic).”
Nikhyle Dasarath, founder of Nutritional, said after the initial coin offering was announced to shareholders, the JSE contacted the company and it then decided to house the coin privately.
“We wanted the coin as an offspring [of the listed company]. We didn’t know better at the time as soon as we received communication. We separated accordingly.”
He registered the firm Cannacrypt on March 30, five days after the shareholder letter was released. Cannacrypt will sell and look after the coin’s assets.
Dasarath said there were no regulatory frameworks around cryptocurrencies in SA.
He said the technical document explaining the creation and value in the coin has been removed from its website as it was now developing an official prospectus about the coin that will be given to potential investors. “We want to be as transparent as possible.”
The JSE requires all listed companies to hire a “designated adviser” who ensures that the business complies with listing requirements and regulations.
Nutritional’s designated adviser, Exchange Sponsors, quit on March 26, a day after the letter was e-mailed to shareholders. It said it was not permitted to disclose why it is no longer involved.
Exchange Sponsors spokesperson Marius Meyer said: “The reasons are confidential between us and the JSE.”
Dasarath said he could not divulge why their sponsor quit, but when the JSE asked about this, it gave explanations to the exchange.
childk@businesslive.co.za
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