Crypto Company Settles SEC Charges for Unregistered "Interest Feature" Securities

Steven Lofchie Commentary by Steven Lofchie

A company that borrowed crypto securities and promised to return them with interest settled SEC charges for failing to file a registration statement or qualify for an exemption under the Securities Act.

According to the Order, the company allowed holders of crypto asset accounts, held by the company, to loan the assets in their accounts back to the company in exchange for a variable interest rate. The company then re-loaned the assets to borrowers. The SEC found the arrangements between the company and the account holders to be "investment contracts" that were improperly sold without an effective registration statement. As a result, the SEC found that the company violated Sections 5(a) and 5(c) ("Prohibitions relating to interstate commerce and the mails") of the Securities Act.

To settle the charges, the company agreed to (i) cease and desist violations of SA Section 5(a) and (c) ("Prohibitions relating to interstate commerce and the mails") and (ii) pay a civil monetary penalty of $1,500,000. In determining an appropriate penalty amount, the SEC took into consideration the company's remedial efforts.


In this case, the SEC concludes that the interest feature constitutes the offer and sale of investment contracts under the Howey test. But the argument for a violation of law on these facts does not depend on a Howey analysis. The case that is far more on-point is Reves v. Ernst and Young, (borrowing from retail investors, even on a very short-term basis, with the promise of an interest return, may constitutes the issuance of a debt security). See also commentary in Coinbase Says SEC May Sue to Stop Its Lending Program.

By citing to Howey only, and not relying on Reves, in an enforcement settlement where the defendants are not challenging the SEC's legal conclusions, the SEC may be trying to bolster the significance of Howey by demonstrating its importance. Perhaps it is doing so because the SEC's reliance on Howey has been significantly challenged in the Ripple decision and in the more recent Coinbase hearings.

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