Crypto Company Settles Charges for Unregistered Securities Offering
Commentary by Steven Lofchie
A company offering crypto asset-related financial products and services settled charges with the SEC for failing to register securities offerings.
The SEC found that the company accepted fiat currency from investors, used the fiat currency to buy USD Coin ("USDC") and then loaned the USDC to institutional borrowers, who paid interest that was used in turn to pay interest to the original investors. The SEC stated that the rate paid to investors was generally higher than they would have earned in a bank account.
The SEC found that the company offered and sold the arrangements, which it called "investment contracts," without registering them with the SEC, in violation of Securities Act Section 5(a) and (c) ("Prohibitions relating to interstate commerce and the mails").
To settle the charges, the company agreed to a cease-and-desist Order. According to the Order, after the SEC settled, the company decided to cease offering the product. It notified investors that they should redeem their investments and all investments were returned. Based on the company's cooperation during the investigation and related enforcement action, the SEC determined not to impose a civil monetary penalty.
Commentary
Notwithstanding the significant uncertainty as to whether many cryptocurrencies are securities, this is an example of a transaction that clearly involved the sale of a security. That is, the company borrowed money from retail investors (i.e., the company issued a debt security) and paid them interest. Reves v. Ernst & Young, 494 U.S. 56 (Supreme Court, February 21, 1990).
The fact that there was an intermediate step involving USDC is completely irrelevant to the legal analysis.