Crypto Firms Settle Charges for Unregistered Lending Program
Commentary by Rachael Hashmall
Two crypto firms, one an issuer and the other its agent, settled with the SEC for engaging in the unregistered offer and sale of securities through a crypto asset lending program.
In its Complaint filed in the Southern District of New York, the SEC charged the firms with conducting an unregistered securities offering through a program where retail investors, among others, could "loan" crypto assets to the issuer in return for an obligation of the issuer to return the assets with interest. (See previous coverage.)
To settle the charges, the firms agreed to (i) pay a $21 million civil penalty and (ii) a permanent injunction. Under the terms of the settlement, the SEC will not receive any portion of the penalty until after payment of all other allowed claims by the bankruptcy court, including claims by retail investors in the crypto asset lending program.
Commentary
The SEC has taken a clear stance that crypto lending is subject to the federal securities laws. The settlement wraps up legal proceedings that began in early 2023 and is one of many in the last few years regarding a crypto lending program.
Notably, the settlement comes a few days after the Court denied the firms' motion to dismiss and allowed the SEC's case to move forward. Judge Ramos of the Southern District of New York found that under both the Howey test and the Reves test, the SEC's Complaint "plausibly alleges" that the defendants violated the US federal securities laws by offering and selling unregistered securities through the crypto asset lending program.
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The SEC charged two crypto firms, one an issuer and the other its agent, with conducting an unregistered securities offering through a program where retail investors, among others, could "loan" crypto-assets to the issuer in return for an obligation of the issuer to return the assets with interest.
