Once sizzling blockchain stocks start to fizzle
Long before Riot Blockchain (RIOT) made a name for itself for the meteoric rise of its stock price, it was a biotech company named Bioptix. That company had failed to obtain approval from the U.S. Food and Drug Administration for a blood-based appendicitis test and held patents on veterinary products.
The money-losing company decided last year to enter the business of blockchain, the underlying technology in cryptocurrencies like bitcoin and ethereum, after it was presented with an opportunity to invest in the Canadian cryptocurrency exchange Coinsquare Ltd. It then changed its name to Riot Blockchain, the first Nasdaq-listed company to use the technology's name.
"I feel obligated to state unequivocally that pivoting away from these legacy ventures to Riot Blockchain was the right course," wrote Chairman and CEO John O'Rourke in a letter to shareholders. "It is not uncommon for businesses to pivot and change their business strategy. Amazon started off selling books."
Riot Blockchain decided to make an initial investment in Coinsquare at a $28 million valuation based on its management team and platform. O'Rourke said he's a believer in blockchain, having personally invested in bitcoin since 2012. Riot Blockchain's stock, like everything else associated with cryptocurrency, has been on a roller-coaster ride, surging nearly 300 percent over the past year including a 42 percent pullback over the past month.
"We are proud of the value this has since generated for all legacy shareholders of Bioptix, as this investment alone is now worth close to double what the entire market cap of Bioptix was prior to the transition," O'Rourke wrote. "The management and board had no idea what the market reaction would be to this shift in focus. ... Unfortunately, as with many new hot sectors, it attracted some bad actors trying to capitalize on the hype that appeared to quickly change their name and tout their new focus on this sector. This all followed Riot's successful transition."
Indeed, the SEC's Edgar website for corporate filings shows more than two dozen entities with the word "blockchain" in their name. One of them is Long Blockchain (LBCC), formerly a beverage company named Long Island Ice Corp. It saw its shares soar more than 200 percent when it added the word "blockchain" to its name in December. The company on Tuesday named Shamyl Malik as CEO effective immediately and announced plans to spin off its beverage business.
Eastman Kodak (KODK), known for most of its history for its photographic film, experienced a doubling in its share price when it announced in December plans to go into the cryptocurrency business. Both Long Blockchain and Kodak have since posted double-digit percentage declines.
While it isn't illegal for a company to cash in on the latest trends, how Riot Blockchain went about it has raised some concerns and has spurred a class action.
First, as CNBC noted, the company twice adjourned its annual meeting in recent months at Florida's Boca Resort and Beach Club. But it's not clear if it ever planned to hold the gathering because the hotel had no record of a reservation, according to CNBC. Riot Blockchain, which claims that it was unfairly maligned by CNBC, counters that the meetings were canceled because there wasn't a quorum of investors.
According to the business news channel, it also appeared that O'Rourke was working out of the office of Barry Honig, the company's majority shareholder, who failed to make timely filings about his stock sales to the Securities and Exchange Commission. CNBC also raised concerns about O'Rourke's $869,000 in stock sales, which he said were appropriate and represented only about 10 percent of his overall position.
"This company has apparently put the cart before the horse in terms of saying we are going to do great things in blockchain," said attorney David P. Abel of the U.S. Market Advisors Law Group, who brought the case. "A lot of what they have done is just riding on the hype as opposed to showing investors that they can be profitable."
O'Rourke didn't respond to a request for comment on this story.
