Financial Services Company Fined $100 Million and Agrees to Pursue Registration of its Crypto Lending Product

February 24, 2022

On February 14, 2022, the SEC settled charges against a financial services company (Company) for failing to register the offers and sales of its retail crypto lending product in violation of Sections 5(a) and 5(c) of the Securities Act. In the same settlement order (Order), the SEC settled charges against the Company for failing to register as an investment company in violation of Section 7(a) of the Investment Company Act. In addition, the Order found that the Company made false and misleading statements concerning the level of risk in its loan portfolio and lending activity in violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act.  SEC Chairman Gensler noted this was the first case of its kind involving crypto lending platforms.

The Order states that from March 4, 2019 to the date of the Order, the Company sold “Interest Accounts” (IAs) to investors, through which investors lent crypto assets to the Company in exchange for the Company’s promise to provide a variable monthly interest payment. The Company generated the interest paid to IA investors in various ways, including through making loans of crypto assets to institutional and corporate borrowers, by lending U.S. dollars to retail investors, and by investing in equities and futures. Citing the federal securities laws and applicable case law, the SEC determined that the IAs were securities because they were notes and because the Company offered and sold the IAs as investment contracts.

The SEC also found that the Company had operated as an unregistered investment company from at least December 31, 2019 to at least September 30, 2021. During the relevant time period, the Company was an issuer of securities engaged in the business of investing, reinvesting, owning, holding, or trading in securities, and owned investment securities—such as loans of crypto assets and U.S. dollars to counter parties, investments in crypto asset trusts and funds, and intercompany receivables—having a value exceeding 40% of its total assets (exclusive of Government securities and cash items).

In addition, according to the Order, the Company made a material misrepresentation to IA investors concerning the level of risk in its loan portfolio. Between March 4, 2019 and August 31, 2021, the Company stated in several website posts that its institutional loans were “typically” over-collateralized, when in fact, at its highest rate during the relevant time period, less than 25% of its institutional crypto asset loans were over-collateralized.

In settling the matter, the Company agreed to pay a total of $100 million in fines (comprised of a $50 million SEC penalty and an additional $50 million in fines to 32 states to settle similar charges), cease its unregistered offers and sales of the IAs, and attempt to bring its business within the provisions of the Investment Company Act within 60 days of the institution of the Order.

The SEC press release can be found here.

The Order can be found here.

For a crypto-focused analysis of this enforcement action, visit our SKrypto blog.


Categories

Enforcement Actions, Miscellaneous, Regulatory