ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement on Form S-3 that we filed with the Securities and Exchange Commission (the “SEC”)
using a “shelf” registration process. Under this shelf registration process, we may sell common shares, preferred
shares (including convertible preferred shares), warrants for equity securities, and units comprised of any combination thereof
from time to time in one or more offerings up to an initial aggregate offering price of $7,472,417. This prospectus provides
you with a general description of the securities we may offer, which is not meant to be a complete description of each of the
securities.
Each
time we sell securities, we will provide a prospectus supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information contained in this prospectus or in documents incorporated
by reference in this prospectus. A prospectus supplement which contains specific information about the terms of the securities
being offered may also include a discussion of certain U.S. Federal income tax consequences and any risk factors or other special
considerations applicable to the securities offered under this registration statement. To the extent that any statement that we
make in a prospectus supplement is inconsistent with statements made in this prospectus or in documents incorporated by reference
in this prospectus, you should rely on the information contained in the prospectus supplement. You should carefully read this
prospectus and any prospectus supplement together with the additional information described under “Where You Can Find More
Information” before buying any securities in this offering.
THIS
PROSPECTUS MAY NOT BE USED TO CONSUMMATE A SALE OF SECURITIES UNLESS IT IS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
Neither
we, nor any agent, underwriter or dealer has authorized any person to give any information or to make any representation other
than those contained or incorporated by reference in this prospectus, any applicable prospectus supplement or any related free
writing prospectus prepared by us or on our behalf or to which we have referred you. This prospectus, any applicable supplement
to this prospectus or any related free writing prospectus do not constitute an offer to sell or the solicitation of an offer to
buy any securities other than the registered securities to which they relate, nor do this prospectus, any applicable supplement
to this prospectus or any related free writing prospectus constitute an offer to sell or the solicitation of an offer to buy securities
in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction.
You
should not assume that the information contained in this prospectus, any applicable prospectus supplement or any related free
writing prospectus is accurate on any date subsequent to the date set forth on the front of the applicable document. You should
also not assume that any information we have incorporated by reference is correct on any date subsequent to the date of the document
incorporated by reference, even though this prospectus, any applicable prospectus supplement or any related free writing prospectus
is delivered, or securities are sold, on a later date.
This
prospectus and the information incorporated by reference in this prospectus contain summaries of provisions of certain other documents,
but reference is made to the actual documents for complete information. All of the summaries are qualified in their entirety by
the actual documents. Copies of some of the documents referred to in this prospectus have been filed, will be filed or will be
incorporated by reference as exhibits to the registration statement of which this prospectus is a part, and you may obtain copies
of those documents as described below under the heading “Where You Can Find More Information” on page 32 of this prospectus.
You
should only rely on the information contained or incorporated by reference in this prospectus, any prospectus supplement or any
related free writing prospectus. We have not authorized anyone to provide you with information different from what is contained
or incorporated by reference into this prospectus, applicable prospectus supplement or any related free writing prospectus. If
any person does provide you with information that differs from what is contained or incorporated by reference in this prospectus,
applicable prospectus supplement or any related free writing prospectus, you should not rely on it. No dealer, salesperson or
other person is authorized to give any information or to represent anything not contained in this prospectus, applicable prospectus
supplement or any related free writing prospectus. You should assume that the information contained in this prospectus, any prospectus
supplement or any related free writing prospectus is accurate only as of the date on the front of the document and that any information
contained in any document we have incorporated by reference therein is accurate only as of the date on its face, regardless of
the time of delivery of this prospectus, any prospectus supplement, any related free writing prospectus or any sale of a security
under this registration statement. These documents are not an offer to sell or a solicitation of an offer to buy these securities
in any circumstances under which the offer or solicitation is unlawful.
SUMMARY
This
summary highlights selected information from this prospectus and does not contain all of the information that you should consider
in making your investment decision. You should carefully read the entire prospectus, the applicable prospectus supplement and
any related free writing prospectus, including the risks of investing in our securities discussed under the heading “Risk
Factors” contained in the applicable prospectus supplement and any related free writing prospectus, and under similar headings
in the documents that are incorporated by reference into this prospectus. You should also carefully read the information incorporated
by reference into this prospectus, including our financial statements, and the exhibits to the registration statement of which
this prospectus is a component.
The
terms “Marathon,” the “Company,” “we,” “our” or “us” in this prospectus
refer to Marathon Patent Group, Inc. and its wholly-owned subsidiaries, unless the context suggests otherwise.
About
Marathon Patent Group, Inc.
We
were incorporated in the State of Nevada on February 23, 2010 under the name Verve Ventures, Inc. On December 7, 2011, we changed
our name to American Strategic Minerals Corporation and were engaged in exploration and potential development of uranium and vanadium
minerals business. In June 2012, we discontinued our minerals business and began to invest in real estate properties in Southern
California. In October 2012, we discontinued our real estate business when our former CEO joined the firm and we commenced our
IP licensing operations, at which time the Company’s name was changed to Marathon Patent Group, Inc. On November 1, 2017,
we entered into a merger agreement with Global Bit Ventures, Inc. (“GBV”), which is focused on mining digital assets.
We purchased cryptocurrency mining machines and established a data center in Canada to mine digital assets. We intend to expand
its activities in the mining of new digital assets, while at the same time harvesting the value of our remaining IP assets.
On
June 28, 2018, our Board has determined that it is in the best interests of the Company and our shareholders to allow the Amended
Merger Agreement with GBV to expire on its current termination date of June 28, 2018 without further negotiation or extension.
The Board approved to issue 750,000 shares of our common stock to GBV as a termination fee for us canceling the proposed
merger between the two companies.
Digital
Asset Mining
We
intend to power and secure blockchains by verifying blockchain transactions using custom hardware and software. We are currently
using our hardware to mine bitcoin (“BTC”) and expect to mine BTC and ether (“ETH”), and potentially other
cryptocurrencies. Bitcoin and ether rely on different technologies based on the blockchain. Wherein bitcoin is a digital currency
and ether is generally associated with smart contracts and digital tokens, we will be compensated in either BTC or ETH based on
the mining transactions we perform for each, which is how we will earn revenue.
Blockchains
are decentralized digital ledgers that record and enable secure peer-to-peer transactions without third party intermediaries.
Blockchains enable the existence of digital assets by allowing participants to confirm transactions without the need for a central
certifying authority. When a participant requests a transaction, a peer-to-peer network consisting of computers, known as nodes,
validate the transaction and the user’s status using known algorithms. After the transaction is verified, it is combined
with other transactions to create a new block of data for the ledger. The new block is added to the existing blockchain in a way
that is permanent and unalterable, and the transaction is complete.
Digital
assets (also known as cryptocurrency) are a medium of exchange that uses encryption techniques to control the creation of monetary
units and to verify the transfer of funds. Many consumers use digital assets because it offers cheaper and faster peer-to-peer
payment options without the need to provide personal details. Every single transaction and the ownership of every single digital
asset in circulation is recorded in the blockchain. Miners use powerful computers that tally the transactions to run the blockchain.
These miners update each time a transaction is made and ensure the authenticity of information. The miners receive a transaction
fee for their service in the form of a portion of the new digital “coins” that are issued.
Competition
Subject
to raising additional capital, our digital asset initiatives will compete with other industry participants that focus on investing
in and securing the Blockchains of bitcoin and other digital assets. Market and financial conditions, and other conditions beyond
the Company’s control, may make it more attractive to invest in other entities, or to invest in bitcoin or digital assets
directly. Companies have raised substantial capital this year seeking to enter the digital assets business. Our lack of capital
is a competitive disadvantage.
Patent
Enforcement Litigation
As
of March 31, 2019, we were not involved in any active patent enforcement litigation.
Employees
As
of March 31, 2019, we had 3 full-time employees. We believe our employee relations to be good.
Recent
Developments
Reverse
Stock Split
On
April 8, 2019, the Company effected a 1:4 reverse stock split of its issued and outstanding common stock and all equity instrument
numbers in this prospectus have been adjusted to account for this reverse stock split.
Patent
Purchase
On
January 11, 2018, the Company entered into a Patent Rights Purchase and Assignment Agreement (the “Agreement”), with
XpresSpa Group, Inc., a Delaware Corporation (the “Seller”) and Crypto Currency Patent Holdings Company LLC, a Delaware
limited liability company and wholly owned subsidiary of the Company (“CCPHC”). Pursuant to the Agreement, the Seller
agreed to irrevocably assign, sell, grant, transfer and convey, and CCPHC agreed to accept and acquire, the exclusive right, title
and interest in and to certain patents owned by the Seller (“Assigned IP”), subject to the terms and conditions set
forth in the Agreement. As consideration for the Assigned IP, the Seller shall receive (i) payment in the amount of $250,000 from
CCPHC and (ii) 62,500 shares of common stock of the Company, par value $0.0001 per share (the “Consideration Shares”),
with piggyback registration rights. The Consideration Shares were issued by the Company to the Seller, subject to the terms and
conditions of a lock-up agreement. The fair value of the 62,500 shares was $960,000 and was based upon the closing price
of the Company’s common stock.
As
a condition to the Agreement, the Seller agreed to enter into a lock-up agreement with the Company, which lock-up agreement is
included as an exhibit to the Agreement (the “Lock-up Agreement”). Pursuant to the Lock-up Agreement, the Seller shall
not directly or indirectly offer, sell, pledge or transfer, or otherwise dispose of, the Consideration Shares for a period of
180 days commencing on January 11, 2018 and ending on July 11, 2018; provided, however, upon the effective date of the registration
for resale of the Consideration Shares, and on each day thereafter, one twentieth (1/20) of the Consideration Shares shall be
released from the restrictions contained in the Lock-up Agreement and may be freely sold, transferred, traded or otherwise disposed
of. Notwithstanding the foregoing, in the event that the Consideration Shares, in whole or in part, are not registered for resale
on the 6-month anniversary of the date of issuance of the Consideration Shares (“Six-Month Date”), the holders thereof
may sell, transfer, trade or otherwise dispose of one twentieth (1/20) of the Consideration Shares on the Six-Month Date and on
each day thereafter.
In
addition, the Company agreed to issue 6,250 shares of the Company’s common stock to Andrew Kennedy Lang, one of the
named inventors of the patents, in exchange for consulting services, and 12,500 shares of the Company’s common stock
to another individual in exchange for consulting services, in connection with the acquisition of the Assigned IP. The fair value
of these shares was $278,750 and was based upon the closing price of the Company’s common stock on date of agreement. The
Company recorded the fair value of these shares as a component of compensation and related taxes expense.
Lease
and Purchase of Digital Asset Mining Servers
On
February 7, 2018, Marathon Crypto Mining, Inc. (“MCM”), a Nevada corporation and wholly owned subsidiary of the Company,
entered into an agreement to acquire 1,400 Bitmain’s Antminer S9 miners (“Antminer S9s”).
On
February 12, 2018, in connection with the intended mining operations of MCM, the Company assumed a lease contract dated November
11, 2017 (the “Lease Agreement”) by and between 9349-0001 Quebec Inc. (the “Lessor”) and Blocespace Inc.,
formerly known as Cryptoespace Inc. (the “Lessee”). Pursuant to the Lease Agreement, among other things, the Lessee
leases a building of 26,700 square feet (the “Property”) in Quebec, Canada, for an initial term of five (5) years
(the “Term”), commencing on December 1, 2017 and terminating on November 30, 2022. The Lessee shall pay a monthly
rent of $10,012.50 plus tax, or an annual rent of $120,150.00 plus tax (“Yearly Rent”). At the signing of the Lease
Agreement, the Lessee paid the Lessor a deposit equal to the Yearly Rent which amount will be dispersed during the Term as set
forth in the Lease Agreement.
The
Lessee assigned the Lease Agreement to MCM pursuant to an Assignment and Assumption Agreement (the “Assignment”) by
and between the Company and the Lessee’s parent company, Bloctechnologies Canada Inc. Subject to the terms and conditions
of the Assignment, MCM agreed to observe all the covenants and conditions of the Lease Agreement, including the payment of all
rents due. The Company shall be responsible for all necessary capital expenditures in connection with capital improvements to
the Property to set up MCM’s mining operations.
The
1,400 Antminer S9s were delivered to the Property and installation commenced on or about March 7, 2018, with the commencement
of digital asset mining shortly thereafter.
GBV
Merger Termination
On
April 3, 2018, the Company and GBV entered into the Amended and Restated Agreement and Plan of Merger (the “Amended Merger
Agreement”), which amends certain terms, among others, in the Merger Agreement, as follows: (i) the Outside Closing Date,
as amended, shall be further extended to ninety (90) days from April 3, 2018, subject to consecutive 30-day extensions upon mutual
written consent of the Parties; (ii) the Company Shareholders shall receive 17,500,000 Parent Common Shares (reduced from
31,668,639 Parent Common Shares) on a fully diluted basis, which include any Parent Common Shares underlying the Parent’s
Series C Preferred Stock issuable in lieu of the Parent Common Shares at the election of the Company Shareholders who would own
more than 2.49% of the Parent Common Shares as a result of the Merger; and (iii) in the event that the Merger fails to close by
August 9, 2018 or the Company’s Shareholders vote not to approve the Merger, the Parent will issue to the Company, an aggregate
of 3,000,000 Parent Common Shares to reimburse GBV for its costs and expenses. All capitalized terms otherwise not defined herein
shall have the meanings set forth in the Amended Merger Agreement.
On
July 3, 2018, the board has determined that it is in the best interests of the Company and its shareholders to allow the Amended
Merger Agreement to expire on its current termination date of June 28, 2018 without further negotiation or extension. The Board
approved to issue 750,000 shares of the Company’s common stock to GBV as a termination fee for the Company canceling
the proposed merger between the two companies.
Feinberg
Litigation
On
March 27, 2018, Jeffrey Feinberg, purportedly joined by the Jeffrey L. Feinberg Personal Trust and the Jeffrey L. Feinberg Family
Trust, filed a complaint against the Company and certain of its former officers and directors. The complaint was filed in the
Supreme Court of the State of New York, County of New York. The plaintiffs purported to state claims under Sections 11, 12(a)(2)
and 15 of the federal Securities Act of 1933 and common law claims for “actual fraud and fraudulent concealment,”
constructive fraud, and negligent misrepresentation, seeking unspecified money damages (including punitive damages), as well as
costs and attorneys’ fees, and equitable or injunctive relief. On June 15, 2018, the defendants filed a motion to dismiss
all claims asserted in the complaint and, on July 27, 2018, the plaintiffs filed an opposition to that motion. The court heard
argument on the motion and, on January 15, 2019, the court granted the motion to dismiss, allowing 30 days for the filing of an
amended complaint. On February 15, 2019, Jeffrey Feinberg, individually and as trustee of the Jeffrey L. Feinberg Personal Trust,
and Terrence K. Ankner, as trustee of the Jeffrey L. Feinberg Family Trust, filed an amended complaint that purports to state
the same claims and seeks the same relief sought in the original complaint. On March 7 and 22, 2019, defendants filed motions
to dismiss the amended complaint and on April 5, 2019, plaintiffs filed an opposition to those motions. The court has tentatively
scheduled oral argument on the motions to dismiss on July 9, 2019.
Ramirez
Litigation
On
July 20, 2018, Tony Ramirez filed a complaint against the Company and certain of its former directors. The complaint was filed
in the United States District Court for the Central District of California. Mr. Ramirez alleged that he was a shareholder of the
Company and purported to assert a single claim under Section 14(a) of the Securities and Exchange Act of 1934 and SEC Rule 14a-9
promulgated thereunder. The parties entered into a “Settlement Agreement and Mutual Release” and the case was voluntarily
dismissed with prejudice on December 17, 2018.
Amazon
Litigation
As
part of the cancellation of certain indebtedness owed to Fortress Investment Group, LLC, we transferred ownership of various patents,
including U.S. Patent No. 7,177,798, commonly referred to as “Patent 798.” Fortress created a new Special Purpose
Entity, CF Dynamic Advances LLC, in which we own a 30% interest. In May 2018, Rensselaer Polytechnic Institute and CF Dynamic
Advances LLC filed a complaint against Amazon.com, Inc. in the United States District Court for the Northern District of New York,
which alleges, among other things, that “Alexa Voice Software and Alexa enabled devices” infringe U.S. Patent No.
7,177,798, entitled “Natural Language Interface Using Constrained Intermediate Dictionary of Results.” The complaint
seeks an injunction, monetary damages, an ongoing royalty, pre- and post-judgment interest, attorneys’ fees, and
costs. If plaintiffs are successful, and if the recoveries or settlement proceeds are sufficient following litigation expenses
and recovery of amounts due in connection with the cancelled loan, the special purpose entity could be entitled to a portion of
the net proceeds. There can be no assurance that the plaintiff will be successful or that any recoveries will exceed amounts due
under the debt settlement arrangements or that our 30% interest in the special purpose entity will have any value even if the
plaintiffs are successful in their case against Amazon.
Other
than as disclosed herein, we know of no other material, active or pending legal proceedings against us, nor are we involved as
a plaintiff in any material proceedings or pending litigation other than in the normal course of business.
Liquidity
and Capital Resources
The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which
contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the consolidated financial statements, the Company had an accumulated deficit of approximately $102.1 and
103.1 million respectively at December 31, 2018 and March 31, 2019 respectively, a net loss of approximately $12.8 million and
$1.0 million, respectively, and approximately $8.2 million and $0.8 million, respectively, net cash used in operating activities
for the year ended December 31, 2018 and the three months ended March 31, 2019. These factors raise substantial doubt about the
Company’s ability to continue as a going concern.
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise
operate on an ongoing basis. At December 31, 2018, the Company’s cash and cash equivalents balances totaled $2.6 million
compared to $14.9 million at December 31, 2017. At March 31, 2019, the Company’s cash and cash equivalents balances totaled
$2.0 million.
Net
working capital decreased by $6.6 million, to $0.7 million at December 31, 2018 from $7.4 million at December 31, 2017. Net working
capital decreased by $0.6 million, to $0.1 million at March 31, 2019 from $0.7 million at December 31, 2018.
Cash
used in operating activities was $8.2 million during the year ended December 31, 2018 and cash used in operating activities of
$10.8 million during the year ended December 31, 2017. Cash used in operating activities was $0.8 million during the three months
ended March 31, 2019 and cash used in operating activities of $3.7 million during the three months ended March 31, 2018.
Cash
used in investing activities was $4.2 million during the year ended December 31, 2018 and cash provided by investing activities
of $7,788 for the year ended December 31, 2017. Cash used in investing activities was $0.2 million during the three months
ended March 31, 2019 and $5.9 million for the three months ended March 31, 2018.
Cash
provided by financing activities was $0 during the year ended December 31, 2018 compared to cash provided by financing activities
in the amount of $20.4 million during the year ended December 31, 2017. Cash provided by financing activities for the three months
ended March 31, 2019 and 2018 was $0. Cash provided by financing activities for the year ended December 31, 2017 resulted from
proceeds from issuance of notes payable, the sale of common stock issued pursuant to an ATM offering, offset by payments made
for notes payable.
Based
on our current revenue and profit projections, we are uncertain that our existing cash will be sufficient to fund its operations
through at least the next twelve months, raising substantial doubt regarding our ability to continue operating as a going concern.
If we do not meet our revenue and profit projections or the business climate turns negative, then we will need to:
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raise
additional funds to support our operations; provided, however, there is no assurance that we will be able to raise such additional
funds on acceptable terms, if at all. If we raise additional funds by issuing securities, existing stockholders may be diluted;
and
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review
strategic alternatives.
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If
adequate funds are not available, we may be required to curtail our operations or other business activities or obtain funds through
arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets.
Accounting
for Digital Currencies
The
lack of U.S. Generally Accepted Accounting Principles (U.S. GAAP) instruction regarding the proper accounting treatment of digital
currency assets has created uncertainty regarding the reporting and proper asset classification of digital currency holdings.
Management intends to exercise its business judgment in determining appropriate accounting treatment for the recognition of revenue
from mining of digital currencies. Management, in conjunction with its outside public accountants and its auditors, has examined
various factors surrounding the substance of the Company’s operations and the available guidance published for public company
accounting practices in Accounting Standards Codification.
The
Company intends to account for its digital currency assets as indefinite life intangible assets. An intangible asset with an indefinite
useful life is not amortized, but rather is assessed for impairment annually, or more frequently, when events or changes in circumstances
occur which indicate that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying
amount exceeds its fair value. In testing for impairment, the Company will have the option to first perform a qualitative assessment
to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than
not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required
to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis
of the asset. Subsequent reversal of impairment losses is not permitted. Realized gain or loss on the sale of digital currencies
is included in other income or expenses in the Company’s statements of operations.
RISK
FACTORS
Investing
in our securities involves a high degree of risk. Before making an investment decision, you should consider carefully the risks,
uncertainties and all risk factors set forth in the applicable prospectus supplement and the documents incorporated by reference
in this prospectus, including the risk factors discussed under the heading “Risk Factors” in our most recent Annual
Report on Form 10-K for the year ended December 31, 2018, as amended, and each subsequent filed quarterly report on Form
10-Q and current reports on Form 8-K, which may be amended, supplemented or superseded from time to time by the other reports
we file with the SEC in the future.
In
addition to those risk factors incorporated by reference herein, the Company has identified the following uncertainties and risk
factors which may affect our business:
The
price of our common stock may be influenced by the market price of digital currencies, among other factors, which may be susceptible
to wide swings in value.
Digital
currency market prices, in particular that of bitcoin, which represents our primary digital currency asset, have experienced significant
short- and long-term fluctuations in value. There is no assurance that the price of digital currencies (i.e. bitcoin) may not
have an adverse effect on the price of our common stock, despite management’s best efforts to pursue the Company’s
core businesses. This is because the value and price of our common stock, as determined by the investing public, may be influenced
by future anticipated adoption or appreciation in value of digital currencies or the blockchain generally, factors over which
the Company has little or no influence or control. The Company’s share price may also be subject to pricing volatility due
to supply and demand factors associated with few or limited public company options for investment in the digital currency industry.
Digital
currency market prices are determined primarily using data from various exchanges, over-the-counter markets, and derivative platforms.
Furthermore, such prices may be subject to factors such as those that impact commodities, more so than business activities, which
could be subjected to additional influence from fraudulent or illegitimate actors, real or perceived scarcity, and political,
economic, regulatory or other conditions. Pricing may be the result of, and may continue to result in, speculation regarding future
appreciation in the value of digital currencies, or the Company or its share price, inflating and making their market prices more
volatile or creating “bubble” type risks. As of the date of this prospectus, the trading price of bitcoin and other
digital currencies has experienced significant decline and the trading price of our common stock has experienced a similar decline.
If the trading price of the Company’s common stock declines below NASDAQ listing standards for an extended period our common
stock could be suspended or delisted from the NASDAQ exchange.
Future
sales and issuances of our equity securities or rights to purchase our equity securities would result in additional dilution of
the percentage ownership of our stockholders.
Our
stockholders may experience substantial dilution as we raise additional capital through issuances of equity securities. We may,
from time to time, sell common stock, preferred stock, warrants, units, options or convertible securities or other equity securities
in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, preferred stock,
warrants, units, options or convertible securities or other equity securities in more than one transaction, investors may be further
diluted by subsequent sales. Management believes additional capital must be raised to continue executing the Company’s strategic
plans. Management believes potential shareholder dilution resulting from the Company’s capital raising activities will be
offset by increases in Company value and corresponding increases in the trading price of our common stock. Management cannot,
however, guarantee that such sales will not result in material dilution to our existing stockholders, and further notes that new
investors could gain rights superior to existing stockholders.
Currently,
there is relatively small use of bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators,
thus contributing to price volatility that could adversely affect an investment in the Company.
A
significant portion of bitcoin demand is generated by speculators and investors seeking to profit from the short or long-term
holding of bitcoins. A lack of expansion by bitcoins into retail and commercial markets, or alternative uses, may result in increased
volatility or a reduction in the price of bitcoin, either of which could adversely impact the market price of digital currencies
and may cause the trading price of our common stock to decline. Furthermore, no assurance can be made that, as markets for the
exchange of digital currencies develop and mature, the inherent insubstantiality of stateless currency will not continue to contribute
to the volatility of its conversion price to State-backed fiat currencies.
Banks
and financial institutions may not provide banking services, or may cut off existing services, to businesses that provide digital
currency related services or accept payment in the form of digital currencies, including financial institutions of investors in
our securities.
A
number of companies that provide digital currency related services have been unable to contract with banks or other similar financial
institutions to provide such companies with banking services. Similarly, a number of companies and individuals associated with
digital currencies and the provision of digital currency related services have had their existing banking services relationships
terminated as a result of their association with digital currencies. Accordingly, the Company recognizes that its relationships
with banking institutions could be subject to reconsideration and even termination, depending on their internal controls and practices
vis-à-vis
digital currencies.
Many
businesses and individuals in the digital currencies field may experience difficulty in finding banking services which may have
an adverse effect on the usefulness of digital currencies as a payment system, and further, that such lack of broad based acceptance
may cause further harm to the public perception of digital currencies. These acceptance issues pervade the market for digital
currencies and could act as an artificial deflationary pressure on the price of our digital currency assets and the overall trading
price of our common stock.
The
lack of broad base acceptance of digital currencies by banking institutions could result in increased compliance costs, risk of
loss, and adverse governmental regulatory action of our activities such that out business operations and projections may be significantly
adversely affected. This risk may also apply to underwriters, brokers, and ultimate holders of our securities, as our involvement
in the digital currencies sector may be linked to our investors through our securities. Enforcement action by any governmental
or quasi-governmental organization that prevents us from readily converting digital currencies into State-backed fiat currencies
could have a material adverse effect on our Company.
If
we are unable to attract major brokerage firms, we could have difficulty selling our common stock.
If
we are unable to attract the interest of major brokerage firms through the value of our Company, we may be unable to secure their
confidence and recommendation to purchase our common stock. The absence of such coverage may depress or otherwise slow the development
of a robust market for our common stock, slowing our ability to raise capital.
The
online nature of the block chain exchanges will expose them to risks of third party hacking attacks, which, due to the nature
of Blockchain technologies, may result in irreversible or unrecoverable losses to exchange users.
The
online marketplace has long been subject to hackers and other malicious actors. The Company’s business is an online-based
platform and will be subject to these same hacking risks. The Company has written and maintains a cybersecurity policy that outlines
an extensive list of controls and supervisory practices in place reasonably designed to diligently supervise the risks of unauthorized
access or attack of its information technology systems, and to respond appropriately should unauthorized access or cyber-attack
occur. The Company, in conjunction with its third party vendors, will continually work to improve existing security protocols
and develop new security techniques and software to address future threats to the platform, its users and valuable assets. The
Company’s policy of air-gapping its digital assets from the internet to the extent possible means that its digital currency
assets should not be reached by an online penetration of its security framework, thereby limiting the impact of a hacking event
on the overall Company. The platform will have similar air-gapping and private key protections for its users’ digital currency
wallets. As such, similar hacking attacks should have limited success in illegally transferring user data and digital currency
assets if they gain illegal access to the platform.
Although
the Company will implement these anti-hacking measures, the platform remains exposed to risks from: DDoS attacks to limit
the availability of exchange services or otherwise disrupt normal operations; account takeover attempts in which the platform
users are targeted by hackers or other illegal actors to gain access to login credentials, which could allow the illicit user
to transfer user assets held via the platform or commit other fraud; targeted software exploits designed to take advantage
of vulnerabilities and flaws in the underlying software components of the exchange, digital wallets, and web services provided
to the platform over which the Company has little to no control in order to gain access to or transfer of user digital
currency assets; potential misdirection of funds and assets by online “spoofers” posing as the platform representatives,
by man in the middle interceptions of the digital transfers similar to wire-tapping, browser session tampering in which the user’s
internet service provider is compromised, and malware that is designed or may be designed to target the digital signal of digital
currency exchanges in order to redirect exchanged assets away from their intended recipients; phishing activities in which user
login credentials are stolen; natural disasters temporarily or permanently disabling our physical servers; human error and insider
threats to our servers and the platform; and other unforeseen or unforeseeable threats to the platform. The occurrence of any
one or a number of these risk factors could have a material negative impact on our business, resulting in a decline in the trading
price of shares of our common stock. Should this occur, our investors could lose some or all of their investment in our common
stock; accordingly, investors in our Company should seriously consider these risk factors when considering investing in our Company.
Regulatory
action against existing bitcoin and other digital currency exchanges may have a detrimental effect on the acceptance and widespread
use of our planned digital currency exchange, the platform.
In
recent years, a number of bitcoin exchanges have been closed by governmental regulatory action due to alleged fraud and security
breaches. Some investors were not compensated for the loss of their account balances on these exchanges. While our planned exchange
is being developed to be licensed by the appropriate U.S. governmental and quasi-governmental regulatory authorities prior to
launch, its planned scope will make it a desirable target for malware, DDoS, and other hacking attacks, which could lead to regulatory
backlash against the platform. The Company is working with its regulators to ensure alignment with standards set for business
in the same sector for compliance, fraud prevention, and cybersecurity. The Company cannot, however, predict or prevent all future
threats and acknowledges that digital currency exchanges are possibly exposed to the following risks: denial of service attacks,
account takeover attempts, software exploits due to vulnerabilities and flaws, potential misdirection of funds and assets, phishing,
natural disasters, human error, insider threats and other factors that can render the exchange of digital currency untrustworthy.
Additionally,
international action against bitcoin exchanges has been harsh; China has moved to shut down all digital currency exchanges operating
within its borders. Until such action was announced, mainland China and Hong Kong were responsible for a majority of global digital
currency transactions. We are aware of the threat posed by governmental and quasi-governmental regulators to the short and long-term
success of the platform, and we have taken steps to mitigate these risks by working closely with U.S. and state regulators
to obtain all proper licenses and approvals prior to the launch of the platform. The Company cannot mitigate against, or
even fully anticipate, all regulatory actions which may be taken against it or the digital currency sector as a whole in the future,
and such risks pose a threat to the success of our business operations. Further, the Company’s efforts to mitigate against
hacking attacks are necessarily limited by the present knowledge of various malware designs and other hacking methods; the remains
the possibility that future unforeseeable hacking techniques could harm the platform. Furthermore, occurrence of these
hacking attacks may trigger regulatory backlash, which could temporarily suspend or even shut down operation of the platform.
We believe such regulatory actions will be less common in the future as digital currencies continue to gain acceptance, however,
such enforcement actions presently pose a risk to the value of our planned exchange, the platform, and to the trading price
of our common stock. Should any of these risk factors (or other unforeseen risk factors) occur, the Company may suffer substantial
material harm, which may have a negative effect on the trading price of our common stock.
We
may not have adequate recourse against third parties if our bitcoins and other digital currency assets are lost, stolen or destroyed.
The
online nature of digital currencies such as bitcoins and their immutability poses a unique threat to their security. We have implemented
robust security measures to minimize the exposure of our digital currencies to such risks including, without limitation, cold
storage procedures to “air-gap” our digital currency keys from the internet. These measures are not perfect and improper
access to and transfer of our digital current assets may still occur despite our security measures. By their nature, bitcoin transactions
are largely irreversible. Our recourse in the event of theft or other loss is limited to our ability to secure restitution from
the improper transferors or transferees of our digital currency assets. Recovery from such individuals may be limited by a number
of factors including, without limitation, our ability to locate and identify both the transferors and transferees. This risk may
pose a threat to the trading price of our common stock, and the occurrence of such an event could have a materially adverse effect
on our business and operations.
Since
there has been limited precedence set for financial accounting of digital assets other than digital securities, it is unclear
how we will be required to account for digital asset transactions in the future.
Since
there has been limited precedence set for the financial accounting of digital assets other than digital securities, it is unclear
how we will be required to account for digital asset transactions or assets. Furthermore, a change in regulatory or financial
accounting standards could result in the necessity to restate our financial statements. Such a restatement could negatively impact
our business, prospects, financial condition and results of operation.
The
further development and acceptance of digital asset networks and other digital assets, which represent a new and rapidly changing
industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance
of digital asset systems may adversely affect an investment in us.
Digital
assets such as bitcoins and ether, that may be used, among other things, to buy and sell goods and services are a new and rapidly
evolving industry of which the digital asset networks are prominent, but not unique, parts. The growth of the digital asset industry
in general, and the digital asset networks of bitcoin and ether in particular, are subject to a high degree of uncertainty. The
factors affecting the further development of the digital asset industry, as well as the digital asset networks, include:
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worldwide growth in the adoption and use of bitcoins and other digital assets;
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government
and quasi-government regulation of bitcoins and other digital assets and their use, or restrictions on or regulation of access
to and operation of the digital asset network or similar digital assets systems;
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the
maintenance and development of the open-source software protocol of the bitcoin network and ether network;
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changes
in consumer demographics and public tastes and preferences;
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the
availability and popularity of other forms or methods of buying and selling goods and services, including new means of using
fiat currencies;
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general
economic conditions and the regulatory environment relating to digital assets; and
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the
impact of regulators focusing on digital assets and digital securities and the costs associated with such regulatory oversight.
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A
decline in the popularity or acceptance of the digital asset networks of bitcoin or ether, or similar digital asset systems, could
adversely affect an investment in us.
If
we acquire digital securities, even unintentionally, we may violate the Investment Company Act of 1940 and incur potential third-party
liabilities
As
this prospectus discloses, there is an increased regulatory examination of digital assets and digital securities. This has led
to regulatory and enforcement activities. In order to limit our acquisition of digital securities to stay within the 40% threshold,
we will examine the manner in which digital assets were initially marketed to determine if they may be deemed digital securities
and subject to federal and state securities laws. Even if we conclude that a particular digital asset such as ether or bitcoin
is not a security under the Securities Act, certain states including California take a stricter view of the term “investment
contract” which means the digital asset may have violated applicable state securities laws. This will result in increased
compliance costs and legal fees. If our examination of a digital asset is incorrect, we may incur regulatory penalties and private
investor liabilities.
Currently,
there is relatively small use of digital assets in the retail and commercial marketplace in comparison to relatively large use
by speculators, thus contributing to price volatility that could adversely affect an investment in us.
As
relatively new products and technologies, digital assets and the blockchain networks on which they exist have only recently become
widely accepted as a means of payment for goods and services by many major retail and commercial outlets, and use of digital assets
by consumers to pay such retail and commercial outlets remains limited. Conversely, a significant portion of demand for digital
assets is generated by speculators and investors seeking to profit from the short- or long-term holding of such digital assets.
A lack of expansion of digital assets into retail and commercial markets, or a contraction of such use, may result in increased
volatility or a reduction in the price of all or any digital asset, either of which could adversely impact an investment in us.
Significant
contributors to all or any digital asset network could propose amendments to the respective network’s protocols and software
that, if accepted and authorized by such network, could adversely affect an investment in us.
For
example, with respect to bitcoins network, a small group of individuals contribute to the Bitcoin Core project on GitHub.com.
This group of contributors is currently headed by Wladimir J. van der Laan, the current lead maintainer. These individuals can
propose refinements or improvements to the bitcoin network’s source code through one or more software upgrades that alter
the protocols and software that govern the bitcoin network and the properties of bitcoin, including the irreversibility of transactions
and limitations on the mining of new bitcoin. Proposals for upgrades and discussions relating thereto take place on online forums.
For example, there is an ongoing debate regarding altering the blockchain by increasing the size of blocks to accommodate a larger
volume of transactions. Although some proponents support an increase, other market participants oppose an increase to the block
size as it may deter miners from confirming transactions and concentrate power into a smaller group of miners. To the extent that
a significant majority of the users and miners on the bitcoin network install such software upgrade(s), the bitcoin network would
be subject to new protocols and software that may adversely affect an investment in the Shares. In the event a developer or group
of developers proposes a modification to the bitcoin network that is not accepted by a majority of miners and users, but that
is nonetheless accepted by a substantial plurality of miners and users, two or more competing and incompatible blockchain implementations
could result. This is known as a “hard fork.” In such a case, the “hard fork” in the blockchain could
materially and adversely affect the perceived value of digital assets as reflected on one or both incompatible blockchains, which
may adversely affect an investment in us.
Forks
in a digital asset network may occur in the future which may affect the value of digital assets held by us.
For
example, on August 1, 2017 bitcoin’s blockchain was forked and Bitcoin Cash was created. The fork resulted in a new blockchain
being created with a shared history, and a new path forward. Bitcoin Cash has a block size of 8mb and other technical changes.
On October 24, 2017, bitcoin’s blockchain was forked and Bitcoin Gold was created. The fork resulted in a new blockchain
being created with a shared history, and new path forward, Bitcoin Gold has a different proof of work algorithm and other technical
changes. The value of the newly created Bitcoin Cash and Bitcoin Gold may or may not have value in the long run and may affect
the price of bitcoin if interest is shifted away from bitcoin to the newly created digital assets. The value of bitcoin after
the creation of a fork is subject to many factors including the value of the fork product, market reaction to the creation of
the fork product, and the occurrence of forks in the future. As such, the value of bitcoin could be materially reduced if existing
and future forks have a negative effect on bitcoin’s value. If a fork occurs on a digital asset network which we are mining
or hold digital assets in it may have a negative effect on the value of the digital asset and may adversely affect an investment
in us.
For
example, the open-source structure of the bitcoin network protocol means that the contributors to the protocol are generally not
directly compensated for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade
the protocol could damage the bitcoin network and an investment in us.
The
bitcoin network for example operates based on an open-source protocol maintained by contributors, largely on the Bitcoin Core
project on GitHub. As an open source project, bitcoin is not represented by an official organization or authority. As the bitcoin
network protocol is not sold and its use does not generate revenues for contributors, contributors are generally not compensated
for maintaining and updating the bitcoin network protocol. Although the MIT Media Lab’s Digital Currency Initiative funds
the current maintainer Wladimir J. van der Laan, among others, this type of financial incentive is not typical. The lack of guaranteed
financial incentive for contributors to maintain or develop the bitcoin network and the lack of guaranteed resources to adequately
address emerging issues with the bitcoin network may reduce incentives to address the issues adequately or in a timely manner.
Changes to a digital asset network which we are mining on may adversely affect an investment in us.
If
a malicious actor or botnet obtains control in excess of 50% of the processing power active on any digital asset network, including
the bitcoin network or ether network, it is possible that such actor or botnet could manipulate the blockchain in a manner that
adversely affects an investment in us.
If
a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions
of the computers) obtains a majority of the processing power dedicated to mining on any digital asset network, including the bitcoin
network or ether network, it may be able to alter the blockchain by constructing alternate blocks if it is able to solve for such
blocks faster than the remainder of the miners on the blockchain can add valid blocks. In such alternate blocks, the malicious
actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new digital assets
or transactions using such control. Using alternate blocks, the malicious actor could “double-spend” its own digital
assets (i.e., spend the same digital assets in more than one transaction) and prevent the confirmation of other users’ transactions
for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of
the processing power or the digital asset community does not reject the fraudulent blocks as malicious, reversing any changes
made to the blockchain may not be possible. Such changes could adversely affect an investment in us.
For
example, in late May and early June 2014, a mining pool known as GHash.io approached and, during a 24- to 48-hour period in early
June may have exceeded, the threshold of 50 percent of the processing power on the bitcoin network. To the extent that GHash.io
did exceed 50 percent of the processing power on the network, reports indicate that such threshold was surpassed for only a short
period, and there are no reports of any malicious activity or control of the blockchain performed by GHash.io. Furthermore, the
processing power in the mining pool appears to have been redirected to other pools on a voluntary basis by participants in the
GHash.io pool, as had been done in prior instances when a mining pool exceeded 40 percent of the processing power on the bitcoin
network.
The
approach towards and possible crossing of the 50 percent threshold indicate a greater risk that a single mining pool could exert
authority over the validation of digital asset transactions. To the extent that the digital assets ecosystems do not act to ensure
greater decentralization of digital asset mining processing power, the feasibility of a malicious actor obtaining in excess of
50 percent of the processing power on any digital asset network (e.g., through control of a large mining pool or through hacking
such a mining pool) will increase, which may adversely impact an investment in us.
If
the award of digital assets for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize
miners, miners may cease expending hashrate to solve blocks and confirmations of transactions on the blockchain could be slowed
temporarily. A reduction in the hashrate expended by miners on any digital asset network could increase the likelihood of a malicious
actor obtaining control in excess of fifty percent (50%) of the aggregate hashrate active on such network or the blockchain, potentially
permitting such actor to manipulate the blockchain in a manner that adversely affects an investment in us.
As
the award of new digital assets for solving blocks declines, and if transaction fees are not sufficiently high, miners may not
have an adequate incentive to continue mining and may cease their mining operations. For example, the current fixed reward on
the bitcoin network for solving a new block is twelve and a half (12.5) bitcoins per block; the reward decreased from twenty-five
(25) bitcoin in July 2016. It is estimated that it will halve again in about four (4) years. This reduction may result in a reduction
in the aggregate hashrate of the bitcoin network as the incentive for miners will decrease. Moreover, miners ceasing operations
would reduce the aggregate hashrate on the bitcoin network, which would adversely affect the confirmation process for transactions
(i.e., temporarily decreasing the speed at which blocks are added to the blockchain until the next scheduled adjustment in difficulty
for block solutions) and make the bitcoin network more vulnerable to a malicious actor obtaining control in excess of fifty (50)
percent of the aggregate hashrate on the bitcoin network. Periodically, the bitcoin network has adjusted the difficulty for block
solutions so that solution speeds remain in the vicinity of the expected ten (10) minute confirmation time targeted by the bitcoin
network protocol.
Marathon
believes that from time to time there will be further considerations and adjustments to the bitcoin network, and others, including
the ether network, regarding the difficulty for block solutions. More significant reductions in aggregate hashrate on digital
asset networks could result in material, though temporary, delays in block solution confirmation time. Any reduction in confidence
in the confirmation process or aggregate hashrate of any digital asset network may negatively impact the value of digital assets,
which will adversely impact an investment in us.
To
the extent that the profit margins of digital asset mining operations are not high, operators of digital asset mining operations
are more likely to immediately sell their digital assets earned by mining in the digital asset exchange market, resulting in a
reduction in the price of digital assets that could adversely impact an investment in us.
Over
the past two years, digital asset mining operations have evolved from individual users mining with computer processors, graphics
processing units and first-generation servers. Currently, new processing power brought onto the digital asset networks is predominantly
added by incorporated and unincorporated “professionalized” mining operations. Professionalized mining operations
may use proprietary hardware or sophisticated machines. They require the investment of significant capital for the acquisition
of this hardware, the leasing of operating space (often in data centers or warehousing facilities), incurring of electricity costs
and the employment of technicians to operate the mining farms. As a result, professionalized mining operations are of a greater
scale than prior miners and have more defined, regular expenses and liabilities. These regular expenses and liabilities require
professionalized mining operations to more immediately sell digital assets earned from mining operations on the digital asset
exchange market, whereas it is believed that individual miners in past years were more likely to hold newly mined digital assets
for more extended periods. The immediate selling of newly mined digital assets greatly increases the supply of digital assets
on the digital asset exchange market, creating downward pressure on the price of each digital asset.
The
extent to which the value of digital assets mined by a professionalized mining operation exceeds the allocable capital and operating
costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher
percentage of its newly mined digital assets rapidly if it is operating at a low profit margin—and it may partially or completely
cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold into
the digital asset exchange market more rapidly, thereby potentially reducing digital asset prices. Lower digital asset prices
could result in further tightening of profit margins, particularly for professionalized mining operations with higher costs and
more limited capital reserves, creating a network effect that may further reduce the price of digital assets until mining operations
with higher operating costs become unprofitable and remove mining power from the respective digital asset network. The network
effect of reduced profit margins resulting in greater sales of newly mined digital assets could result in a reduction in the price
of digital assets that could adversely impact an investment in us.
To
the extent that any miners cease to record transactions in solved blocks, transactions that do not include the payment of a transaction
fee will not be recorded on the blockchain until a block is solved by a miner who does not require the payment of transaction
fees. Any widespread delays in the recording of transactions could result in a loss of confidence in that digital asset network,
which could adversely impact an investment in us.
To
the extent that any miners cease to record transaction in solved blocks, such transactions will not be recorded on the blockchain.
Currently, there are no known incentives for miners to elect to exclude the recording of transactions in solved blocks; however,
to the extent that any such incentives arise (e.g., a collective movement among miners or one or more mining pools forcing bitcoin
users to pay transaction fees as a substitute for or in addition to the award of new bitcoins upon the solving of a block), actions
of miners solving a significant number of blocks could delay the recording and confirmation of transactions on the blockchain.
Any systemic delays in the recording and confirmation of transactions on the blockchain could result in greater exposure to double-spending
transactions and a loss of confidence in certain or all digital asset networks, which could adversely impact an investment in
us.
The
acceptance of digital asset network software patches or upgrades by a significant, but not overwhelming, percentage of the users
and miners in any digital asset network could result in a “fork” in the respective blockchain, resulting in the operation
of two separate networks until such time as the forked blockchains are merged. The temporary or permanent existence of forked
blockchains could adversely impact an investment in us.
Digital
asset networks are open source projects and, although there is an influential group of leaders in, for example, the bitcoin network
community known as the “Core Developers,” there is no official developer or group of developers that formally controls
the bitcoin network. Any individual can download the bitcoin network software and make any desired modifications, which are proposed
to users and miners on the bitcoin network through software downloads and upgrades, typically posted to the bitcoin development
forum on GitHub.com. A substantial majority of miners and bitcoin users must consent to those software modifications by downloading
the altered software or upgrade that implements the changes; otherwise, the changes do not become a part of the bitcoin network.
Since the bitcoin network’s inception, changes to the bitcoin network have been accepted by the vast majority of users and
miners, ensuring that the bitcoin network remains a coherent economic system; however, a developer or group of developers could
potentially propose a modification to the bitcoin network that is not accepted by a vast majority of miners and users, but that
is nonetheless accepted by a substantial population of participants in the bitcoin network. In such a case, and if the modification
is material and/or not backwards compatible with the prior version of bitcoin network software, a fork in the blockchain could
develop and two separate bitcoin networks could result, one running the pre-modification software program and the other running
the modified version (i.e., a second “bitcoin” network). Such a fork in the blockchain typically would be addressed
by community-led efforts to merge the forked blockchains, and several prior forks have been so merged. This kind of split in the
bitcoin network could materially and adversely impact an investment in us and, in the worst case scenario, harm the sustainability
of the bitcoin network’s economy.
Intellectual
property rights claims may adversely affect the operation of some or all digital asset networks.
Third
parties may assert intellectual property claims relating to the holding and transfer of digital assets and their source code.
Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in some
or all digital asset networks’ long-term viability or the ability of end-users to hold and transfer digital assets may adversely
affect an investment in us. Additionally, a meritorious intellectual property claim could prevent us and other end-users from
accessing some or all digital asset networks or holding or transferring their digital assets. As a result, an intellectual property
claim against us or other large digital asset network participants could adversely affect an investment in us.
The
digital asset exchanges on which digital assets trade are relatively new and, in most cases, largely unregulated and may therefore
be more exposed to fraud and failure than established, regulated exchanges for other products. To the extent that the digital
asset exchanges representing a substantial portion of the volume in digital asset trading are involved in fraud or experience
security failures or other operational issues, such digital asset exchanges’ failures may result in a reduction in the price
of some or all digital assets and can adversely affect an investment in us.
The
digital asset exchanges on which the digital assets trade are new and, in most cases, largely unregulated. Furthermore, many digital
asset exchanges (including several of the most prominent USD denominated digital asset exchanges) do not provide the public with
significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance. As
a result, the marketplace may lose confidence in, or may experience problems relating to, digital asset exchanges, including prominent
exchanges handling a significant portion of the volume of digital asset trading.
For
example, over the past 4 years, a number of bitcoin exchanges have been closed due to fraud, failure or security breaches. In
many of these instances, the customers of such bitcoin exchanges were not compensated or made whole for the partial or complete
losses of their account balances in such bitcoin exchanges. While smaller bitcoin exchanges are less likely to have the infrastructure
and capitalization that make larger bitcoin exchanges more stable, larger bitcoin exchanges are more likely to be appealing targets
for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive
information or gain access to private computer systems). Further, the collapse of the largest bitcoin exchange in 2014 suggests
that the failure of one component of the overall bitcoin ecosystem can have consequences for both users of a bitcoin exchange
and the bitcoin industry as a whole.
More
recently, the Wall Street Journal has reported that China will shut down bitcoin exchanges and other virtual currency trading
platforms. The article reported that China has accounted for the bulk of global bitcoin trading.
A
lack of stability in the digital asset exchange market and the closure or temporary shutdown of digital asset exchanges due to
fraud, business failure, hackers or malware, or government-mandated regulation may reduce confidence in the digital asset networks
and result in greater volatility in digital asset values. These potential consequences of a digital asset exchange’s failure
could adversely affect an investment in us.
Political
or economic crises may motivate large-scale sales of digital assets, which could result in a reduction in some or all digital
assets’ values and adversely affect an investment in us.
As
an alternative to fiat currencies that are backed by central governments, digital assets such as bitcoins, which are relatively
new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and
selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless,
political or economic crises may motivate large-scale acquisitions or sales of digital assets either globally or locally. Large-scale
sales of digital assets would result in a reduction in their value and could adversely affect an investment in us.
Demand
for ether and bitcoin is driven, in part, by their status as the two most prominent and secure digital assets. It is possible
that digital assets other than ether and bitcoin could have features that make them more desirable to a material portion of the
digital asset user base, resulting in a reduction in demand for ether and bitcoin, which could have a negative impact on the price
of ether and bitcoin and adversely affect an investment in us.
Bitcoins
and ether, as assets, hold “first-to-market” advantages over other digital assets. This first-to-market advantage
is driven in large part by having the largest user bases and, more importantly, the largest combined mining power in use to secure
their respective blockchains and transaction verification systems. Having a large mining network results in greater user confidence
regarding the security and long-term stability of a digital asset’s network and its blockchain; as a result, the advantage
of more users and miners makes a digital asset more secure, which makes it more attractive to new users and miners, resulting
in a network effect that strengthens the first-to-market advantage.
As
of November 21, 2017, there were over 1,300 alternate digital assets tracked by CoinMarketCap, having a total market capitalization
(including the market capitalization of ether and bitcoin) of approximately $245 billion, using market prices and total available
supply of each digital asset. This included digital assets using a “proof of work” mining structure similar to bitcoin,
and those using a “proof of stake” transaction verification system that is different than bitcoin’s mining system
(e.g., Peercoin, Bitshares and NXT). As of November 21, 2017, bitcoin’s $138 billion market capitalization was approximately
four (4) times the size of the $35 billion market cap of ether, the second largest proof-of-work digital asset. Despite the marked
first-mover advantage of the bitcoin network over other digital asset networks, it is possible that another digital asset could
become materially popular due to either a perceived or exposed shortcoming of the bitcoin network protocol that is not immediately
addressed by the bitcoin contributor community or a perceived advantage of an altcoin that includes features not incorporated
into bitcoin. If a digital asset obtains significant market share (either in market capitalization, mining power or use as a payment
technology), this could reduce bitcoin’s market share as well as other digital assets we may become involved in and have
a negative impact on the demand for, and price of, such digital assets and could adversely affect an investment in us.
Our
ability to adopt technology in response to changing security needs or trends poses a challenge to the safekeeping of our bitcoins.
The
history of digital asset exchanges has shown that exchanges and large holders of digital assets must adapt to technological change
in order to secure and safeguard their digital assets. We rely on Bitgo Inc.’s multi-signature enterprise storage solution
to safeguard our digital assets from theft, loss, destruction or other issues relating to hackers and technological attack. Our
digital assets will also be moved to various exchanges in order to exchange them for fiat currency during which time we’ll
be relying on the security of such exchanges to safeguard our digital assets. We believe that it may become a more appealing target
of security threats as the size of our bitcoin holdings grow. To the extent that either Bitgo Inc. or we are unable to identify
and mitigate or stop new security threats, our digital assets may be subject to theft, loss, destruction or other attack, which
could adversely affect an investment in us.
Security
threats to us could result in, a loss of our digital assets, or damage to the reputation and our brand, each of which could adversely
affect an investment in us.
Security
breaches, computer malware and computer hacking attacks have been a prevalent concern in the digital asset exchange markets, for
example since the launch of the bitcoin network. Any security breach caused by hacking, which involves efforts to gain unauthorized
access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other
computer equipment, and the inadvertent transmission of computer viruses, could harm our business operations or result in loss
of our digital assets. Any breach of our infrastructure could result in damage to our reputation which could adversely affect
an investment in us. Furthermore, we believe that, as our assets grow, it may become a more appealing target for security threats
such as hackers and malware.
We
primarily rely on Bitgo Inc.’s multi-signature enterprise storage solution to safeguard our digital assets from theft, loss,
destruction or other issues relating to hackers and technological attack. Nevertheless, Bitgo Inc.’s security system may
not be impenetrable and may not be free from defect or immune to acts of God, and any loss due to a security breach, software
defect or act of God will be borne by us. Our digital assets will also be stored with exchanges such as Kraken, Bitfinex, Itbit
and Coinbase and others prior to selling them.
The
security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of
an employee of ours, or otherwise, and, as a result, an unauthorized party may obtain access to our, private keys, data or bitcoins.
Additionally, outside parties may attempt to fraudulently induce employees of ours to disclose sensitive information in order
to gain access to our infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage
systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until
launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an
actual or perceived breach of our security system occurs, the market perception of the effectiveness of our security system could
be harmed, which could adversely affect an investment in us.
In
the event of a security breach, we may be forced to cease operations, or suffer a reduction in assets, the occurrence of each
of which could adversely affect an investment in us.
A
loss of confidence in our security system, or a breach of our security system, may adversely affect us and the value of an investment
in us.
We
will take measures to protect us and our digital assets from unauthorized access, damage or theft; however, it is possible that
the security system may not prevent the improper access to, or damage or theft of our digital assets. A security breach could
harm our reputation or result in the loss of some or all of our digital assets. A resulting perception that our measures do not
adequately protect our digital assets could result in a loss of current or potential shareholders, reducing demand for our Common
Stock and causing our shares to decrease in value.
Digital
Asset transactions are irrevocable and stolen or incorrectly transferred digital assets may be irretrievable. As a result, any
incorrectly executed digital asset transactions could adversely affect an investment in us.
Digital
asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the
recipient of the transaction or, in theory, control or consent of a majority of the processing power on the respective digital
asset network. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer
of digital assets or a theft of digital assets generally will not be reversible, and we may not be capable of seeking compensation
for any such transfer or theft. Although our transfers of digital assets will regularly be made to or from vendors, consultants,
services providers, etc. it is possible that, through computer or human error, or through theft or criminal action, our digital
assets could be transferred from us in incorrect amounts or to unauthorized third parties. To the extent that we are unable to
seek a corrective transaction with such third party or are incapable of identifying the third party which has received our digital
assets through error or theft, we will be unable to revert or otherwise recover incorrectly transferred Company digital assets.
To the extent that we are unable to seek redress for such error or theft, such loss could adversely affect an investment in us.
The
limited rights of legal recourse against us, and our lack of insurance protection expose us and our shareholders to the risk of
loss of our digital assets for which no person is liable.
The
digital assets held by us are not insured. Therefore, a loss may be suffered with respect to our digital assets which is not covered
by insurance and for which no person is liable in damages which could adversely affect our operations and, consequently, an investment
in us.
Digital
assets held by us are not subject to FDIC or SIPC protections.
We
do not hold our digital assets with a banking institution or a member of the Federal Deposit Insurance Corporation (“FDIC”)
or the Securities Investor Protection Corporation (“SIPC”) and, therefore, our digital assets are not subject to the
protections enjoyed by depositors with FDIC or SIPC member institutions.
We
may not have adequate sources of recovery if our digital assets are lost, stolen or destroyed.
If
our digital assets are lost, stolen or destroyed under circumstances rendering a party liable to us, the responsible party may
not have the financial resources sufficient to satisfy our claim. For example, as to a particular event of loss, the only source
of recovery for us might be limited, to the extent identifiable, other responsible third parties (e.g., a thief or terrorist),
any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim of ours.
The
sale of our digital assets to pay expenses at a time of low digital asset prices could adversely affect an investment in us.
We
may sell our digital assets to pay expenses on an as-needed basis, irrespective of then-current prices. Consequently, our digital
assets may be sold at a time when the prices on the respective digital asset exchange market are low, which could adversely affect
an investment in us.
Regulatory
changes or actions may restrict the use of bitcoins or the operation of the bitcoin network in a manner that adversely affects
an investment in us.
Until
recently, little or no regulatory attention has been directed toward bitcoin and the bitcoin network by U.S. federal and state
governments, foreign governments and self-regulatory agencies. As bitcoin has grown in popularity and in market size, the Federal
Reserve Board, U.S. Congress and certain U.S. agencies (e.g., the CFTC, the Commission, FinCEN and the Federal Bureau of Investigation)
have begun to examine the operations of the bitcoin network, bitcoin users and the bitcoin exchange market.
On
July 25, 2017, the Commission issued its Report of Investigation, or “Report,” which concluded that digital assets
or tokens issued for the purpose of raising funds may be securities within the meaning of the federal securities laws. The Report
focused on the activities of ether, which is a prominent digital asset. The Report emphasized that whether a digital asset is
a security is based on the facts and circumstances. Although our activities are not focused on raising capital or assisting others
that do so, the federal securities laws are very broad, and there can be no assurances that the Commission will not take enforcement
action against us in the future including for the sale of unregistered securities in violation of the Securities Act or acting
as an unregistered investment company in violation of the Investment Company Act. The Commission has taken various actions against
persons or entities misusing bitcoin in connection with fraudulent schemes (i.e., Ponzi scheme), inaccurate and inadequate publicly
disseminated information, and the offering of unregistered securities. More recently, the Commission suspended trading in three
digital asset public companies. The CFTC has determined that bitcoin and other virtual currencies are commodities and the sale
of derivatives based on digital currencies must be done in accordance with the provisions of the CEA and CFTC regulations. Also
of significance, is that the CFTC appears to have taken the position that bitcoin is not encompassed by the definition of currency
under the CEA and CFTC regulations. The CFTC defined bitcoin and other “virtual currencies” as “a digital representation
of value” that functions as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender
status in any jurisdiction. Bitcoin and other virtual currencies are distinct from ‘real’ currencies, which are the
coin and paper money of the United States or another country that are designated as legal tender, circulate, and are customarily
used and accepted as a medium of exchange in the country of issuance.” To the extent that bitcoin itself is determined to
be a security, commodity future or other regulated asset, or to the extent that a U.S. or foreign government or quasi-governmental
agency exerts regulatory authority over the bitcoin or bitcoin trading and ownership, trading or ownership in bitcoin or an investment
in us may be adversely affected.
The
CFTC affirmed its approach to the regulation of bitcoin and bitcoin-related enterprises on June 2, 2016, when the CFTC settled
charges against Bitfinex, a bitcoin exchange based in Hong Kong. In its Order, the CFTC found that Bitfinex engaged in “illegal,
off-exchange commodity transactions and failed to register as a futures commission merchant” when it facilitated borrowing
transactions among its users to permit the trading of bitcoin on a “leveraged, margined or financed basis” without
first registering with the CFTC. In 2017, the CFTC stated that it would consider bitcoin and other virtual currencies as commodities
or derivatives depending on the facts of the offering. The CME Group announced that it will permit trading of bitcoin futures
on its exchanges as early as December 2017.
Local
state regulators such as the New York State Department of Financial Services, or NYSDFS, have also initiated examinations of bitcoin,
the bitcoin network and the regulation thereof. In July 2014, the NYSDFS proposed the first U.S. regulatory framework for licensing
participants in “virtual currency business activity.” The proposed regulations, known as the “BitLicense,”
are intended to focus on consumer protection and, after the closure of an initial comment period that yielded 3,746 formal public
comments and a re-proposal, the NYSDFS issued its final “BitLicense” regulatory framework in June 2015. The “BitLicense”
regulates the conduct of businesses that are involved in “virtual currencies” in New York or with New York customers
and prohibits any person or entity involved in such activity to conduct activities without a license.
Additionally,
a U.S. federal magistrate judge in the U.S. District Court for the Eastern District of Texas has ruled that “Bitcoin is
a currency or form of money,” a Florida circuit court judge determined that bitcoin did not qualify as money or “tangible
wealth,” and an opinion from the U.S. District Court for the Northern District of Illinois identified bitcoin as “virtual
currency.” Additionally, two CFTC commissioners publicly expressed a belief that derivatives based on bitcoin are subject
to the same regulation as those based on commodities, and the IRS released guidance treating bitcoin as property that is not currency
for U.S. federal income tax purposes. Taxing authorities of a number of U.S. states have also issued their own guidance regarding
the tax treatment of bitcoin for state income or sales tax purposes. On June 28, 2014, the Governor of the State of California
signed into law a bill that removed state-level prohibitions on the use of alternative forms of currency or value (including bitcoin).
The bill which indirectly authorizes bitcoin’s use as an alternative form of money in the state. In February 2015, a bill
was introduced in the California State Assembly to establish a licensing regime for businesses engaging in “virtual currencies.”
In September 2015, the bill was ordered to become an inactive file and as of the date of this registration statement there hasn’t
been further consideration by the California State Assembly. As of August 2016, the bill was withdrawn from consideration for
vote for the remainder of the year. There is a possibility of future regulatory change altering, perhaps to a material extent,
the nature of an investment in us or the ability of us to continue our operations.
Digital
assets currently face an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions such
as the European Union, China and Russia. While certain governments such as Germany, where the Ministry of Finance has declared
bitcoin to be “
Rechnungseinheiten
” (a form of private money that is recognized as a unit of account, but not
recognized in the same manner as fiat currency), have issued guidance as to how to treat bitcoin, most regulatory bodies have
not yet issued official statements regarding intention to regulate or determinations on regulation of bitcoin, the bitcoin network
and bitcoin users.
Among
those for which preliminary guidance has been issued in some form, Canada and Taiwan have labeled bitcoin as a digital or virtual
currency, distinct from fiat currency, while Sweden and Norway are among those to categorize bitcoin as a form of virtual asset
or commodity. In Australia, a GST (similar to the European value added tax (“VAT”)) is currently applied to bitcoin,
forcing a ten (10%) percent markup on top of market price, essentially preventing the operation of any bitcoin exchange. This
may be undergoing a change, however, since the Senate Economics References Committee and the Productivity Commission recommended
that digital currency be treated as money for GST purposes to remove the double taxation. The United Kingdom determined that the
VAT will not apply to bitcoin sales. In China, a recent government notice classified bitcoin as legal and “virtual commodities;”
however, the same notice restricted the banking and payment industries from using bitcoin, creating uncertainty and limiting the
ability of bitcoin exchanges to operate in the then-second largest bitcoin market. In January 2016, the People’s Bank of
China, China’s central bank, disclosed that it has been studying a state-backed electronic monetary system and potentially
had plans for its own state-backed electronic money. In January 2017, the People’s Bank of China announced that it had found
several violations, including margin financing and a failure to impose anti-money laundering controls, after on-site inspections
of two China-based bitcoin exchanges. In response to the Chinese regulator’s oversight, the three largest China-based bitcoin
exchanges, OKCoin, Huobi, and BTC China, started charging trading commission fees to suppress speculative trading and prevent
price swings which resulted in a significant drop in volume on these exchanges. Since December 2013, China, Iceland, Vietnam and
Russia have taken a more restrictive stance toward bitcoin and, thereby, have reduced the rate of expansion of bitcoin use in
each country. In May 2014, the Central Bank of Bolivia banned the use of bitcoin as a means of payment. In the summer and fall
of 2014, Ecuador announced plans for its own state-backed electronic money, while passing legislation that prohibits the use of
decentralized digital assets such as bitcoin. In July 2016, economists at the Bank of England advocated that central banks issue
their own digital currency, and the House of Lords and Bank of England started discussing the feasibility of creating a national
virtual currency, the BritCoin. As of July 2016, Iceland was studying how to create a system in which all money is created by
a central bank, and Canada was beginning to experiment with a digital version of its currency called CAD-COIN, intended to be
used exclusively for interbank payments. On August 24, 2017, Canada issued guidance stating the sale of cryptocurrency may constitute
an investment contract in accordance with Canadian law for determining if an investment constitutes a security. In July 2016,
the Russian Ministry of Finance indicated it supports a proposed law that bans bitcoin domestically but allows for its use as
a foreign currency. Russia recently issued several releases indicating they may begin regulating bitcoin and licensing miners
and entities engaging in initial coin offerings. Conversely, regulatory bodies in some countries such as India and Switzerland
have declined to exercise regulatory authority when afforded the opportunity. In April 2015, the Japanese Cabinet approved proposed
legal changes that would reportedly treat bitcoin and other digital assets as included in the definition of currency. These regulations
would, among other things, require market participants, including exchanges, to meet certain compliance requirements and be subject
to oversight by the Financial Services Agency, a Japanese regulator. In September 2017 Japan began regulating bitcoin exchanges
and registered several such exchanges to operate within Japan. In July 2016, the European Commission released a draft directive
that proposed applying counter-terrorism and anti-money laundering regulations to virtual currencies, and, in September 2016,
the European Banking authority advised the European Commission to institute new regulation specific to virtual currencies, with
amendments to existing regulation as a stopgap measure. Various foreign jurisdictions may, in the near future, adopt laws, regulations
or directives that affect the bitcoin network and its users, particularly bitcoin exchanges and service providers that fall within
such jurisdictions’ regulatory scope. Such laws, regulations or directives may conflict with those of the United States
and may negatively impact the acceptance of bitcoin by users, merchants and service providers outside of the United States and
may therefore impede the growth of the bitcoin economy. On September 4, 2017, reports were published that China may begin prohibiting
the practice of using cryptocurrency for capital fundraising. Additional reports have surfaced that China is considering regulating
bitcoin exchanges by enacting a licensing regime wherein bitcoin exchanges may legally operate. In September 2017, the Financial
Services Commission of South Korea released a statement that initial coin offerings would be prohibited as a fundraising tool.
In June 2017, India’s government ruled in favor of regulating bitcoin and India’s ministry of Finance is currently
developing rules for such regulation. Australia has previously introduced legislation to regulate bitcoin exchanges and increase
anti-money laundering policies.
The
effect of any future regulatory change on us, bitcoins, or other digital assets is impossible to predict, but such change could
be substantial and adverse to us and could adversely affect an investment in us.
It
may be illegal now, or in the future, to acquire, own, hold, sell or use digital assets in one or more countries, and ownership
of, holding or trading in our securities may also be considered illegal and subject to sanction.
Although
currently digital assets are not regulated or are lightly regulated in most countries, including the United States, one or more
countries such as China and Russia may take regulatory actions in the future that severely restricts the right to acquire, own,
hold, sell or use digital assets or to exchange digital assets for fiat currency. Such an action may also result in the restriction
of ownership, holding or trading in our securities. Such restrictions may adversely affect an investment in us.
If
regulatory changes or interpretations of our activities require our registration as a MSB under the regulations promulgated by
FinCEN under the authority of the U.S. Bank Secrecy Act, we may be required to register and comply with such regulations. If regulatory
changes or interpretations of our activities require the licensing or other registration of us as a money transmitter (or equivalent
designation) under state law in any state in which we operate, we may be required to seek licensure or otherwise register and
comply with such state law. In the event of any such requirement, to the extent Marathon decides to continue, the required registrations,
licensure and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also decide to cease
Marathon’s operations. Any termination of certain Company operations in response to the changed regulatory circumstances
may be at a time that is disadvantageous to investors.
To
the extent that the activities of Marathon cause it to be deemed a money services business (“MSB”) under the regulations
promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, Marathon may be required to comply with FinCEN regulations,
including those that would mandate Marathon to implement anti-money laundering programs, make certain reports to FinCEN and maintain
certain records.
To
the extent that the activities of Marathon cause it to be deemed a “money transmitter” (“MT”) or equivalent
designation, under state law in any state in which Marathon operates, Marathon may be required to seek a license or otherwise
register with a state regulator and comply with state regulations that may include the implementation of anti-money laundering
programs, maintenance of certain records and other operational requirements. Currently, the NYSDFS has finalized its “BitLicense”
framework for businesses that conduct “virtual currency business activity,” the Conference of State Bank Supervisors
has proposed a model form of state level “virtual currency” regulation and additional state regulators including those
from California, Idaho, Virginia, Kansas, Texas, South Dakota and Washington have made public statements indicating that virtual
currency businesses may be required to seek licenses as money transmitters. In July 2016, North Carolina updated the law to define
“virtual currency” and the activities that trigger licensure in a business-friendly approach that encourages companies
to use virtual currency and blockchain technology. Specifically, the North Carolina law does not require miners or software providers
to obtain a license for multi-signature software, smart contract platforms, smart property, colored coins and non-hosted, non-custodial
wallets. Starting January 1, 2016, New Hampshire requires anyone exchanges a digital currency for another currency must become
a licensed and bonded money transmitter. In numerous other states, including Connecticut and New Jersey, legislation is being
proposed or has been introduced regarding the treatment of bitcoin and other digital assets. Marathon will continue to monitor
for developments in such legislation, guidance or regulations.
Such
additional federal or state regulatory obligations may cause Marathon to incur extraordinary expenses, possibly affecting an investment
in the Shares in a material and adverse manner. Furthermore, Marathon and its service providers may not be capable of complying
with certain federal or state regulatory obligations applicable to MSBs and MTs. If Marathon is deemed to be subject to and determines
not to comply with such additional regulatory and registration requirements, we may act to dissolve and liquidate Marathon. Any
such action may adversely affect an investment in us.
Current
interpretations require the regulation of bitcoins under the CEA by the CFTC, we may be required to register and comply with such
regulations. To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may
result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. Any disruption of our operations
in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
Current
and future legislation, CFTC and other regulatory developments, including interpretations released by a regulatory authority,
may impact the manner in which bitcoins are treated for classification and clearing purposes. In particular, bitcoin derivatives
are not excluded from the definition of “commodity future” by the CFTC. We cannot be certain as to how future regulatory
developments will impact the treatment of bitcoins under the law.
Bitcoins
have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation
under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to
register as a commodity pool operator and to register us as a commodity pool with the CFTC through the National Futures Association.
Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting
an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek
to cease certain of our operations. Any such action may adversely affect an investment in us. No CFTC orders or rulings are applicable
to our business.
If
regulatory changes or interpretations require the regulation of bitcoins under the Securities Act and Investment Company Act by
the Commission, we may be required to register and comply with such regulations. To the extent that we decide to continue operations,
the required registrations and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also
decide to cease certain operations. Any disruption of our operations in response to the changed regulatory circumstances may be
at a time that is disadvantageous to investors. This would likely have a material adverse effect on us and investors may lose
their investment.
Current
and future legislation and the Commission rulemaking and other regulatory developments, including interpretations released by
a regulatory authority, may impact the manner in which bitcoins are treated for classification and clearing purposes. The Commission’s
July 25, 2017 Report expressed its view that digital assets may be securities depending on the facts and circumstances. As of
the date of this prospectus, we are not aware of any rules that have been proposed to regulate bitcoins as securities. We cannot
be certain as to how future regulatory developments will impact the treatment of bitcoins under the law. Such additional registrations
may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If we determine
not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any
such action may adversely affect an investment in us.
To
the extent that digital assets including ether, bitcoins and other digital assets we may own are deemed by the Commission to fall
within the definition of a security, we may be required to register and comply with additional regulation under the Investment
Company Act, including additional periodic reporting and disclosure standards and requirements and the registration of our Company
as an investment company. Additionally, one or more states may conclude ether, bitcoins and other digital assets we may own are
a security under state securities laws which would require registration under state laws including merit review laws which would
adversely impact us since we would likely not comply. As stated earlier in this prospectus, some states including California define
the term “investment contract” more strictly than the Commission. Such additional registrations may result in extraordinary,
non-recurring expenses of our Company, thereby materially and adversely impacting an investment in our Company. If we determine
not to comply with such additional regulatory and registration requirements, we may seek to cease all or certain parts of our
operations. Any such action would likely adversely affect an investment in us and investors may suffer a complete loss of their
investment.
If
federal or state legislatures or agencies initiate or release tax determinations that change the classification of bitcoins as
property for tax purposes (in the context of when such bitcoins are held as an investment), such determination could have a negative
tax consequence on our Company or our shareholders.
Current
IRS guidance indicates that digital assets such as ether and bitcoin should be treated and taxed as property, and that transactions
involving the payment of ether or bitcoin for goods and services should be treated as barter transactions. While this treatment
creates a potential tax reporting requirement for any circumstance where the ownership of a bitcoin passes from one person to
another, usually by means of bitcoin transactions (including off-blockchain transactions), it preserves the right to apply capital
gains treatment to those transactions which may adversely affect an investment in our Company.
On
December 5, 2014, the New York State Department of Taxation and Finance issued guidance regarding the application of state tax
law to digital assets such as ether or bitcoins. The agency determined that New York State would follow IRS guidance with respect
to the treatment of digital assets such as ether or bitcoin for state income tax purposes. Furthermore, they defined digital assets
such as ether or bitcoin to be a form of “intangible property,” meaning the purchase and sale of ether or bitcoins
for fiat currency is not subject to state income tax (although transactions of bitcoin for other goods and services maybe subject
to sales tax under barter transaction treatment). It is unclear if other states will follow the guidance of the IRS and the New
York State Department of Taxation and Finance with respect to the treatment of digital assets such as ether or bitcoins for income
tax and sales tax purposes. If a state adopts a different treatment, such treatment may have negative consequences including the
imposition of greater a greater tax burden on investors in bitcoin or imposing a greater cost on the acquisition and disposition
of ether or bitcoin, generally; in either case potentially having a negative effect on prices in the digital asset exchange market
and may adversely affect an investment in our Company.
Foreign
jurisdictions may also elect to treat digital assets such as ether or bitcoin differently for tax purposes than the IRS or the
New York State Department of Taxation and Finance. To the extent that a foreign jurisdiction with a significant share of the market
of ether or bitcoin users imposes onerous tax burdens on ether or bitcoin users, or imposes sales or value added tax on purchases
and sales of ether or bitcoin for fiat currency, such actions could result in decreased demand for ether or bitcoins in such jurisdiction,
which could impact the price of ether, bitcoin or other digital assets and negatively impact an investment in our Company.
The
loss or destruction of a private key required to access a digital asset may be irreversible. Our loss of access to our private
keys or our experience of a data loss relating to our Company’s digital assets could adversely affect an investment in our
Company.
Digital
assets are controllable only by the possessor of both the unique public key and private key relating to the local or online digital
wallet in which the digital assets are held. We are required by the operation of digital asset networks to publish the public
key relating to a digital wallet in use by us when it first verifies a spending transaction from that digital wallet and disseminates
such information into the respective network. We safeguard and keep private the private keys relating to our digital assets by
primarily utilizing Bitgo Inc.’s enterprise multi-signature storage solution; to the extent a private key is lost, destroyed
or otherwise compromised and no backup of the private key is accessible, we will be unable to access the digital assets held by
it and the private key will not be capable of being restored by the respective Digital Asset network. Any loss of private keys
relating to digital wallets used to store our digital assets could adversely affect an investment in us.
If
the award of digital assets for solving blocks and transaction fees for recording transactions are not sufficiently high to cover
expenses related to running data center operations it may have adverse effects on an investment in us.
If
the award of new digital assets for solving blocks declines and transaction fees are not sufficiently high, we may not have an
adequate incentive to continue our mining operations, which may adversely impact an investment in us.
As
the number of digital assets awarded for solving a block in the blockchain decreases, the incentive for miners to continue to
contribute processing power to the respective digital asset network will transition from a set reward to transaction fees. Either
the requirement from miners of higher transaction fees in exchange for recording transactions in the blockchain or a software
upgrade that automatically charges fees for all transactions may decrease demand for digital assets and prevent the expansion
of the digital asset networks to retail merchants and commercial businesses, resulting in a reduction in the price of digital
assets that could adversely impact an investment in us.
In
order to incentivize miners to continue to contribute processing power to any digital asset network, such network may either formally
or informally transition from a set reward to transaction fees earned upon solving for a block. This transition could be accomplished
either by miners independently electing to record in the blocks they solve only those transactions that include payment of a transaction
fee or by the digital asset network adopting software upgrades that require the payment of a minimum transaction fee for all transactions.
If transaction fees paid for digital asset transactions become too high, the marketplace may be reluctant to accept digital assets
as a means of payment and existing users may be motivated to switch from one digital asset to another digital asset or back to
fiat currency. Decreased use and demand for bitcoins or ether that we have accumulated may adversely affect their value and may
adversely impact an investment in us.