The insider trading cloud behind the "Coin Hoarding Fever" of US-listed companies.

Original Title: “Crypto hoarding brings a stock pop for small firms—and in some cases shows patterns of possible insider trading”

Written by: Ben Weiss, Fortune

Compiled by: J1N, Techub News

In mid-July this year, the stock price of cancer drug development company MEI Pharma suddenly surged. The rise in the stock price of this company, which went public on NASDAQ back in 2003, was not due to the discovery of a new anti-cancer drug, but rather because it decided to purchase $100 million worth of Litecoin as company reserve assets.

After announcing its plans to purchase cryptocurrency, MEI Pharma has become the latest company to use a “cryptocurrency reserve” strategy to boost its stock price: When a publicly traded company includes cryptocurrency on its balance sheet, traders often buy up shares of the company in large quantities, causing its market value to increase far beyond the cost of its cryptocurrency purchases. From the day the news was released, MEI Pharma’s stock price rose from $3 all the way to $7, a rise that is not surprising in itself.

However, unexpectedly, in the days leading up to the official announcement, the stock price of MEI Pharma nearly doubled. During this period, the company did not submit any substantial updates to the U.S. Securities and Exchange Commission (SEC), nor did it issue any press releases, and there was almost no buzz on social media.

MEI Pharma is not the only company that experienced an unusual rise in stock price before announcing a cryptocurrency strategy. Fortune magazine found that several other small publicly traded companies also exhibited similar phenomena. Finance professors, investors, and CEOs of other companies believe this indicates that some insiders may have received the news in advance and traded ahead of time.

“It does seem very suspicious to me,” said Xu Jiang, a Duke University professor researching insider trading in public markets. “To my knowledge, many insider trading cases exhibit this pattern.” However, he also pointed out that without a thorough investigation, it cannot be determined whether insider trading actually exists.

A spokesperson for MEI Pharma declined to comment.

Additionally, the four other companies that experienced unusual stock price fluctuations before announcing their purchase of cryptocurrency are: Kindly MD, Empery Digital, Fundamental Global, and 180 Life Sciences Corp—all of which did not respond to requests for comments. Companies VivoPower and Sonnet BioTherapeutics, which also adopt cryptocurrency reserve strategies, had their spokespeople decline to comment.

Cryptocurrency Reserve Craze

Cryptocurrency reserve companies are one of the latest crazes in the cryptocurrency field, and billionaire Michael Saylor is the pioneer of this trend.

In 2020, Saylor announced that Bitcoin would be added to the balance sheet of his data analytics software company Strategy (formerly known as MicroStrategy). Traders viewed the company’s stock as a proxy investment for Bitcoin, and as the price of Bitcoin rose, the stock price of Strategy soared as well.

For Strategy, this strategy has been extremely successful, with the company accumulating nearly $70 billion in Bitcoin, and its market value once reaching approximately $100 billion. Despite this, the company’s revenue in the second quarter of this year was only $115 million (in contrast, Starbucks, with a similar market value, had revenue of $7.8 billion during the same period).

Other companies have also followed suit. Early adopters include a budget hotel chain in Japan, which began purchasing Bitcoin in 2024. This year, the trend has exploded. According to data from cryptocurrency merger and acquisition consulting firm Architect Partners, since January, 184 publicly traded companies have announced the purchase of cryptocurrencies, with a total value of nearly $132 billion.

“We are nearing saturation point,” said Louis Camhi, founder of RLH Capital, a company that has participated in several recent cryptocurrency reserve transactions. He mentioned that investors are currently waiting to see if their cryptocurrency reserve bets can bring actual returns.

Information leakage

However, it is not only retail investors who benefit from the rise in stock prices of cryptocurrency-related listed companies; some external individuals who are connected to the company internally or have advance knowledge of confidential information seem to profit from insider trading.

SharpLink is a company that provides marketing services for bookmakers and casinos. Its stock price remained below $3 in April and early May. On May 27, the company announced it would purchase $425 million worth of Ethereum as reserve assets, and the stock price subsequently soared to nearly $36.

However, in the three trading days prior to the announcement, SharpLink’s stock price doubled from $3 to $6, even though the company had not released any SEC filings or press releases. “There must have been a leak because they were in touch with too many investors, and it was hard to control,” said the CEO of another cryptocurrency reserve company, which had been recommended to participate in the trade but requested anonymity due to discussions about competitors.

SharpLink announced on June 13 that it has completed its first purchase of Ethereum. A spokesperson told Fortune that the company has “established relevant policies and procedures to prevent insider trading,” but declined to provide further details.

Another small non-bank lending company named Mill City Ventures also experienced what is called an “information leak”. Within two trading days before announcing its raise of $450 million to become a SUI reserve company, its stock price soared from below $2 to nearly $6, while the company did not release any announcements regarding significant business changes.

“Before the announcement was released, there was indeed unusual movement in the stock price,” said Stephen Mackintosh, an executive at Mill City Ventures and a partner at the hedge fund Karatage. He later added, “We are confident that the fluctuations in the stock price did not affect the pricing of the transaction.”

Subsequently, Mill City Ventures was renamed SUI Group Holdings.

Insider trading

The public market has clear disclosure rules regarding “material non-public information” that may affect the company’s stock price.

Insiders who learn about significant events typically must agree to be “wall-crossed,” meaning they transition from being external individuals without access to sensitive stock information to becoming insiders with access to that sensitive information. Companies usually maintain a database to record the information of wall-crossed individuals for potential investigations by regulatory authorities into insider trading.

For cryptocurrency reserve companies, related transactions may brew for months, but a few days before the announcement, brokers usually initiate what is called a “roadshow” to widely raise funds from investors.

For example, three days before SharpLink announced its transformation into a cryptocurrency reserve company, company executives pitched fundraising to investors, and during those three days, the company’s stock price soared. Similarly, during the two-day roadshow to raise $450 million for Mill City Ventures, the stock price of this small non-bank lending company also experienced a significant increase.

The U.S. insider trading laws not only prohibit company executives from trading based on information that could affect stock prices, but also prohibit other individuals from trading based on information obtained from executives. Elisha Kobre, a former federal prosecutor for the Southern District of New York and a partner at Sheppard Mullin law firm, stated that this includes investors who gain information during roadshows.

In the case of cryptocurrency reserve companies, it is currently unclear who is profiting from front-running trades. Although some corporate executives declared stock grants or purchases before the transformation, according to SEC filings, the vast majority did not sell their holdings. It is more likely that other insiders, apart from the company’s directors or executives, were informed of the news in advance.

However, this suspicious stock price fluctuation is consistent with researchers’ long-standing observations in the public market. A study conducted in 2014 found that the stock price rose an average of 7% in the 41 days prior to a company’s announcement of a merger or acquisition. While part of the increase may stem from investors’ accurate predictions, the study also pointed out that some of the increase may be due to insider trading.

“There is widespread evidence cited in academia that most illegal insider trading occurs prior to mergers,” said Peter Cziraki, a finance professor at Texas A&M University who studies insider trading, to Fortune. He mentioned a 1992 study that found that 80% of illegal insider trading cases in SEC lawsuits were related to acquisition attempts.

“This kind of thing always happens during major merger and acquisition deals,” said a financial executive involved in cryptocurrency reserve trading, who requested anonymity due to the private nature of the business. “You can always hear the SEC asking who knows what and when.”

Curb insider trading

In recent weeks, companies adopting cryptocurrency reserve strategies have taken additional measures to prevent “information leakage.”

“This is detrimental to the image of the entire industry,” said Camhi, founder of RLH Capital. “Therefore, curbing this problem is beneficial for everyone.”

Hedge fund Karatage investor Mackintosh and his team realized that SharpLink might have information leakage, so they decided to shorten the roadshow duration from three days to two days. “We recognize that the current market sentiment is high, so we are doing our best to conduct transactions in the safest way,” he added.

Other companies have gone further, such as the small public company CEA Industries that focuses on the Canadian e-cigarette market.

In late July, CEA Industries announced it had raised $500 million to become a BNB reserve company. During the roadshow, the trading party did not disclose the stock code for CEA Industries, informing investors only after the market closed on July 25 (Friday). CEA Industries’ CEO David Namdar, now renamed BNB Network Company, stated that this move aims to “minimize the risk of leaks or volatility prior to the announcement.”

A week later, Verb Technology, a small public company developing the live streaming platform MARKET.live, also adopted a similar strategy. In early August, the company announced that it had raised $558 million and held the cryptocurrency TON. The trading party only revealed Verb’s stock code after the market closed on Friday, and one of the company’s investors stated that he requested anonymity due to discussions about private business.

The company’s spokesperson declined to comment.

Similar to CEA Industries, Verb’s announcement was released before the market opened on Monday, allowing potential frontrunners to only buy in pre-market trading.

However, in the four hours before the announcement was released, the stock price still rose by nearly 60%.