[Report] Lodicoin Surprised by SEC Advisory, Lays Fault at Legal Counsel for Compliance Failures

Loditech claimed it was simply guided by its legal counsel and reiterated its intent to comply with all rules relating to its crypto project Lodicoin when it launched.
In response to the SEC’s Show Cause Order, Loditech proposed a settlement, including fine payments but without admitting any liability.
However, the SEC maintained that good faith wouldn’t absolve Loditech of its liability.

Loditech expressed surprise at the Securities and Exchange Commission (SEC) advisory against its crypto project, Lodicoin, asserting that its launch and activities in the Philippines were carried out based on its legal counsel’s advice, a new document from the Commission reveals dated and signed July 5th, 2023. (The SEC document can be found at the end of the article.)

The SEC’s “Order of Revocation” charged Loditech and its incorporators – Richard Martin Cuenca Calunsod, Kristoffer Lawrence Cadevia, Jason Steele Kawehi Lent, and Rosanna Sharei Del Mundo – with selling securities publicly without a license and misrepresenting their corporate capabilities, which proved detrimental to the public.

For more background information, please refer to the following articles on BitPinas:

[BREAKING] SEC Issues Public Advisory Against LODICOIN
[Opinion] Lodicoin, Meet Securities Law

The Show Cause Order from SEC

The Show Cause Order directed LodiTech to explain why its Certificate of Incorporation should not be revoked for serious misrepresentation as to what it can do as a corporation.

The Commission maintained that Loditech overstepped the bounds of what it was authorized to do as a company. Specifically, it was never allowed to solicit investments to the public as stated in its certificate of registration with the SEC.

The SEC also prompted the company to justify why it should not be sanctioned and why criminal charges should not be lodged against it and its incorporators for breaches of the country’s Securities Regulation Code.

As a side note, the SEC did not address Lodicoin’s flash crash that occurred on September 20, 2022. As noted by crypto thought leader Luis Buenaventrura, after it began to be publicly traded on decentralized exchange PancakeSwap, “Within just 20 minutes, the price was in a 95% freefall.”

However, the SEC did address the issue of Loditech being an investment scheme. Using the Howey Test, the SEC found that:

There was an investment of money by the public in the investment scheme of Loditech.
There was a common enterprise in the sense that the investors’ monies were pooled in Loditech’s alleged profit-making venture.
There was clearly an expectation of profits on the part of its investors who were promised that their money would earn as much as 1000% when the digital asset, through the form of a cryptocurrency, is launched.
The expectation of profits is derived primarily from the efforts of others. The investors had no hand in the management of Loditech’s product LodiCoin and were promised to earn profits by merely investing in said project of the entity.

Loditech’s Response to SEC Advisory

On the same day, Loditech submitted its response to the SEC. With regards to the persons specifically named by the SEC:

The company clarified that, apart from being incorporators and stockholders, Kristoffer Lawrence Cadevia and Rosanna Sharei del Mundo were not involved in any discussions, transactions, or approvals related to any of LodiTech’s business activities and were not involved in the company’s operations in any capacity.
Richard Martin Cuenca Calunsod and Jason Steele Kawehi Lent, the officers of LodiTech, led the company in the conduct of its business activities in the Philippines.

Loditech stated that at the very beginning, it intended to comply with all the rules and requirements that will enable it to run its intended business in the Philippines.

In response, the company appointed a legal counsel (referred to as Counsel A throughout the document) to ensure Loditech’s business complied with Philippine laws.

The Role of “Counsel A”

There was no mention of who “Counsel A” might be throughout the entire SEC report. But here’s what this person did for Loditech:

Advised Loditech on registrations and compliance obligations it needed to operate its business model.
Assisted Loditech in setting up its Philippine entity – drafting the Articles of Incorporation and By-Laws, among others.

When the business was incorporated, Loditech stated in its reply to the SEC that Counsel A had advised them they could proceed with their business activities.

“There was no instruction or guidance from Counsel A of any further act, application or

registration that must be performed or secured by Loditech for it to be able to proceed

with any and all of its Business Activities, including the issuance of Lodicoin,” Loditech stated.

The company stated that Lodicoin was intended to be a “utility token.”

Lodicoin Surprised: Blames Counsel A

In its reply, Loditech said it relied on the “representations and assurances” of Counsel A and this person’s capacity to render legal advice.

“Since its inception, the Loditech Officers sought, and relied upon the advice of Counsel A who is supposed to be in a better position to know the Philippine Statutory and regulatory requirements to conduct Loditech’s Business Activities, as well as the processes required to secure and comply with any applicable requirements.”

“Notwithstanding the foregoing and as a further gesture of good faith but without admitting any liability, Loditech and its officers manifests that it is amenable to any settlement as the Commission may prescribe, including payment of appropriate and reasonable fine/s as may be imposed by this Honorable Office in relation to this investigation,” Loditech informed the SEC.

SEC to Lodicoin: Good Faith Not Enough

SEC said no one gets absolved of liability if they don’t know they are committing violation of the Securities Regulation Code (SRC), as Loditech repeatedly claimed in its reply, because the SRC is a “Special Law.” Invoking “good faith will not serve to exculpate the violator from liability,” the Commission stated.

SEC also said the company’s Certificate of Incorporation explicitly stated that it does not authorize “investment solicitation and investment taking without secondary license from this Commission.”

So, even if Loditech was merely following the advice of “Counsel A” in good faith, the SEC emphasized that “the negligence of counsel binds the client. LODITECH retained the service of the counsel of its choice and should therefore bear the consequences of its fault option.”

“The investment scheme of LODITECH also operates to defraud investors as it deceives the investing public by making it appear that it has the authority to deal in securities. This also amounts to serious misrepresentation as to what it can do or is doing to the damage and prejudice of the investing public,” SEC noted in its report.

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