Crypto Firm Fined for Conducting Unregistered Securities Offering

A cryptocurrency firm settled SEC charges for conducting an unregistered securities offering of a crypto asset lending product. Promoted as an investment, the program allowed retail investors to lend crypto assets to the firm, which the firm deposited in interest-yielding accounts in order to generate revenue and make interest payments.

The SEC determined that a registration statement should have been filed because, under the Reves test, the lending product was offered in order to obtain crypto assets for the general use of the firm's business, and retail investors exchanging crypto-assets for a promise of the return of the assets plus interest constituted "notes," i.e., securities. Additionally, the SEC said, the offering was made available to the general public, and was promoted as an investment. The SEC also determined that the program constituted the offer and sale of investment contracts under the Howey test because it involved the investment of money in a common enterprise with an expectation to profit from the efforts of the program.

The SEC determined that the firm violated Securities Act Section 5(a) and 5(c) ("Prohibitions relating to interstate commerce and the mails").

To settle the charges, the firm agreed to (i) cease and desist and (ii) a civil monetary penalty of $22.5 million. The firm also agreed to pay an additional $22.5 million to state securities regulators to settle related charges. In determining the penalties, the SEC considered that the firm voluntarily ceased offering the product to new U.S. investors and ceased paying interest on new funds added to existing accounts of U.S. investors after the SEC announced an enforcement involving a similar crypto investment product. Additionally, the firm said that it will begin phasing out the product in most states, and plans to eventually cease all U.S. operations.