United States: Company Settles SEC Fees for Failing to Register Crypto Lending Product
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A company colonized with the SEC and the North American Securities Administrators Association (“NASAA”) for failing to register offers and sales of its retail crypto lending product.
In his Ordered, the SEC found that the company offered and sold certain interest-bearing accounts to investors. Through the accounts, investors loaned crypto assets to the company in exchange for the company’s promise to provide a variable monthly interest payment. The SEC found that the accounts were securities subject to registration under the Securities Act of 1933 and did not benefit from any exemption from registration with the SEC. Additionally, the SEC found that the company operated as an unregistered investment firm and made materially false and misleading statements regarding the risks associated with its lending business.
The SEC determined that the company violated Sections 5(a) (“Sale or delivery after sale of unregistered securities”), 5(c) (“Requirement to file a registration statement”), 17(a) (2) and 17(a)(3) (“Use of Interstate Commerce to Fraud or Deceive”) of the Securities Act and Sections 3(a)(2) (“Definitions of Investment Securities”) and 7(a) (“Prohibition of Interstate Commerce Transactions”) of the Investment Companies Act.
The company has agreed (i) to cease its unregistered offers and sales and to attempt to bring its activities within the provisions of the law on investment companies and the law on securities, (ii) to pay a $50 million fine and (iii) comply with the covenants detailed in the order.
The company also agreed to pay an additional $50 million fine to 32 states for the same behavior. According to the NASAA press release discussing the charges, the company allegedly “failed to comply with state registration requirements and as a result investors were sold unregistered securities in violation of US law.” the state”. The $50 million fine will be split equally among NASAA members.
Commissioner Hester Peirce dissident of the SEC’s enforcement action, stating that it does not believe that the SEC’s approach to crypto lending is the best way to protect customers from crypto lending. Ms Peirce said the $100million fine for the company ‘seems disproportionate’ given the lack of SEC allegations that the company failed to pay customers the money they were owed owed or returned the crypto assets that had been lent. She argued that while the part of the regulations “aimed at providing important information to customers is more understandable from a retail protection perspective”, it is worth considering “whether a framework other than the framework Securities regulation might be better suited to provide transparency on customer terms and risks of crypto lending products.” Ms Peirce concluded that the settlement could have “unfortunate” consequences, including preventing the retail sale of crypto lending products to customers in the United States. She pointed out that registration “is often a months-long iterative process” and that the SEC should work with crypto lenders “to develop reasonable, timely, and workable regulatory pathways” to comply with securities laws. movables.
Remark Steven Lofchie
The SEC should reconsider its regulation of digital assets. (See Cabinet Commentary: The Securities Law Treatment of Utility Tokens.) As in the Coinbase case, the SEC concluded that the offering here was clearly “value” under Reves v. Ernst & Young. If the SEC takes other companies with similar products to court, the SEC will win.
That said, the SEC should be more willing to engage in the enforcement of securities laws to digital assets. Until it does, market participants have a limited number of strategies: (i) fully comply with securities laws, recognizing that they were not written for assets digital, (ii) take a more reasonable position that the product is not “safety”, or (iii) fly under the radar and hope for the best. An issuer that fails either of the first two tests and becomes big and successful will be in the crosshairs of the SEC.
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