unregistered securities

SEC Charges App Developer Abra for Unregistered Security-Based Swaps

Abra and its affiliate Plutus Tech have agreed to a cease-and-desist order and a combined penalty of $150,000 after being charged by the Securities and Exchange Commission for selling unregistered security-based swaps to investors in 2019.

The Securities and Exchange Commission (SEC) has charged California-based Abra and a related firm Plutus Tech in the Philippines for the sale of unregistered security-based swaps to retail investors and for failing to transact those swaps on a registered national exchange.

According to the official SEC release on July 13, by leveraging Abra’s app, users were able to enter into contracts that provided them with synthetic exposure to price movements of stocks and securities trading in the Unites States—through blockchain-based financial transactions. Users could then choose to mirror these securities and make an investment that would rise and fall with the real-world price. The regulators state that these swap transactions violated US securities law.

Abra first started offering the security-based swaps to investors in February 2019 in the US and abroad. According to the SEC, Abra marketed its app to retail investors but took no steps to determine whether users who downloaded the app were “eligible contract participants” as defined by the securities laws.

According to the order, Abra stopped offering contracts to US investors in February 2019, after conversations with SEC staff, only to resume the business in May 2019, this time limiting the sales to non-US people. However, the SEC maintains that Abra’s employees in California designed and marketed the swap contracts, as well as screened and approved the users. The SEC also states that it was Abra’s US-based employees who effected thousands of stock and ETF purchases withing the US to hedge the contracts.

“Businesses cannot ignore the registration requirements designed to provide investors with the information necessary to evaluate securities transactions,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, “Further, businesses that structure and effect security-based swaps may not evade the federal securities laws merely by transacting primarily with non-U.S. retail investors and setting up a foreign entity to act as a counterparty, while conducting crucial parts of their business in the United States.”

After being charged by the SEC for violating federal securities law—Abra, and its Philippines-based affiliate Plutus Tech have agreed to a cease-and-desist order and to pay a combined penalty of $150,000. In a parallel action, the Commodity Futures Trading Commission (CFTC) also announced a settlement with Abra and Plutus Technologies for similar conduct.

Terraform Labs co-founder defends against SEC allegations

Do Kwon, co-founder of blockchain company Terraform Labs, has defended himself against allegations of fraud brought by the US Securities and Exchange Commission (SEC). Kwon’s lawyers requested the dismissal of the lawsuit, arguing that the SEC’s allegations were unfounded and that US law prohibited regulators from asserting jurisdiction over the digital assets in question.

According to a Bloomberg report, Kwon’s lawyers stated that “US law prohibits the SEC from using federal securities law to assert jurisdiction over the digital assets in this case.” They also claimed that the SEC failed to prove that Kwon had defrauded US investors in connection with the collapse of Terra’s stablecoin, UST.

Kwon’s legal troubles began in March 2022 when he was arrested at Podgorica airport in Montenegro while allegedly attempting to fly to Dubai using fake documents. Following his arrest, both South Korean and American authorities requested Kwon’s extradition. As of now, it remains unclear which country, if any, will be granted their extradition request.

Montenegrin Justice Minister Marko Kovač recently commented on the matter, stating that “determining to which state they will be extradited is based on several factors like the severity of the committed criminal offense, the location and time when the criminal offense has been committed, the order in which we have received the request for extradition and several other factors.”

In addition to defending himself against the SEC’s allegations, Kwon’s lawyers also argued that the UST stablecoin is a currency, not a security. This claim is significant, as US securities law only applies to securities, not currencies.

The collapse of Terra’s UST stablecoin has been a point of controversy for some time. The stablecoin was designed to maintain a stable value of $1, but its value plummeted to $0.85 in late 2021. The collapse reportedly cost investors $40 billion.

While Kwon fights against the SEC’s allegations, another Terraform Labs co-founder, Shin Hyun-Seong, has managed to avoid legal trouble. The Seoul Southern District Court recently denied an arrest warrant for Shin, citing the unconfirmed nature of the allegations and the unlikeliness of Shin being a flight risk or destroying evidence.

In conclusion, the legal proceedings against Do Kwon and Terraform Labs are ongoing, and it remains to be seen how the case will be resolved. However, Kwon’s lawyers’ defense against the SEC’s allegations suggests that there may be significant legal challenges ahead for the regulatory agency.

Terraform Labs Co-Founder Argues Against SEC Lawsuit

In recent news, Terraform Labs co-founder Do Kwon’s lawyers have made arguments in court against the US Securities and Exchange Commission’s (SEC) lawsuit alleging that Kwon illegally offered unregistered securities to US investors. Kwon’s lawyers have requested the lawsuit be dismissed, citing that US law prohibits regulators from using federal securities law to assert jurisdiction over the digital assets in the case. According to Bloomberg, the lawyers also claim that the SEC has failed to prove that Kwon defrauded US investors in connection with the $40 billion collapse of TerraUSD (UST) and Luna (LUNA) cryptocurrencies. The lawyers argue that the stablecoin in question is a currency and not a security.

The legal proceedings began when Kwon was arrested in Podgorica airport, Montenegro, on March 23, while attempting to fly to Dubai using fake documents. Following his arrest, both South Korean and American authorities requested the entrepreneur’s extradition. At present, it is unclear which country, if any, will be granted the extradition of Kwon.

The Seoul Southern District Court recently denied an arrest warrant for Terraform Labs co-founder Shin Hyun-Seong. Although prosecutors saw Kwon’s arrest as an opportunity to apprehend Shin, the court denied the request citing unconfirmed allegations and the unlikeliness of Shin being a flight risk or destroying evidence.

Montenegrin Justice Minister Marko Kovač, through an interpreter, stated that determining to which state Kwon would be extradited would be based on several factors such as the severity of the committed criminal offense, the location and time when the criminal offense was committed, the order in which the request for extradition was received, and several other factors.

Terraform Labs, which is behind the development of the Terra blockchain and several stablecoins, has gained attention in the cryptocurrency industry in recent years. The company has been working on a variety of projects, including an online marketplace and decentralized finance applications. The SEC lawsuit against Kwon is just one of several legal battles that the company has been involved in, including a lawsuit filed by the South Korean financial watchdog against the company’s stablecoin, Terra.

In conclusion, the legal battle between Do Kwon and the SEC is ongoing, and the outcome remains uncertain. However, Kwon’s lawyers’ arguments that the stablecoin in question is a currency and not a security may have implications for the broader cryptocurrency industry. Additionally, the issue of Kwon’s extradition remains unresolved, and it is unclear which country, if any, will be granted the request for his extradition. The Terraform Labs legal battles highlight the regulatory challenges faced by the cryptocurrency industry as it continues to grow and develop.

Coinme Fined $4 Million by SEC

The US Securities and Exchange Commission (SEC) has fined Coinme, a cryptocurrency exchange, nearly $4 million for allegedly offering unregistered securities and making “misleading statements” about its crypto token, UpToken. Coinme, its subsidiary Up Global SEZC, and its CEO, Neil Bergquist, were charged by the SEC on April 28, with Up Global agreeing to pay a $3.52 million penalty, for which Coinme was also held liable. The SEC alleged that Coinme’s Initial Coin Offering (ICO) of UpToken between October and December 2017 was an investment contract under the Howey test and was an unregistered securities offering. The ICO raised around $3.6 million to expand Coinme’s fleet of Bitcoin ATMs, with the funds used to add 30 ATMs, and UP holders received benefits such as discounted fees and cashback when using the ATMs. However, in January 2019, Coinme changed its offering and partnered with Coinstar to use its cash-counting kiosks to facilitate cash-to-crypto transactions instead of its own ATMs. Coinme shut down all of its ATMs by July 2019, and there is currently no use for UpToken, with its market cap falling to around $50,000 and 24-hour trading volumes topping just over $180.

Coinme was found to have offered unregistered securities, and the SEC handed down fines totalling almost $4 million to the company, its subsidiary Up Global SEZC, and the CEO of both firms, Neil Bergquist. The SEC found that Coinme’s ICO of UpToken between October and December 2017 was an unregistered securities offering, and the ICO was considered an investment contract under the Howey test. Coinme raised approximately $3.6 million through the ICO to expand its fleet of Bitcoin ATMs, adding 30 ATMs with ICO funding. UP holders received discounted fees and 1% cashback in UP when using the ATMs. However, in January 2019, Coinme changed its offering, partnering with Coinstar to use its cash-counting kiosks for cash-to-crypto transactions instead of its own ATMs. Coinme shut down all of its ATMs by July 2019, rendering UpToken unusable. The SEC also found that Bergquist and Up Global made false and misleading statements about the demand for UpToken and the amount raised in the ICO.

The SEC’s action against Coinme underscores the agency’s increased scrutiny of the cryptocurrency market, particularly with regard to ICOs and the sale of unregistered securities. The SEC has warned repeatedly that ICOs are subject to federal securities laws, and that any token offered or sold in an ICO must be registered or qualify for an exemption from registration. Failure to comply with these laws can result in enforcement action, as demonstrated in the case of Coinme.

Coinme’s ICO of UpToken highlights the risks associated with investing in ICOs, particularly those that are not registered with the SEC. Investors should conduct thorough due diligence and carefully review the offering materials before investing in any ICO. The case also highlights the importance of transparency and accurate disclosure in the cryptocurrency market, with companies facing enforcement action if they make false or misleading statements.

Coinbase Faces $5M Penalty from New Jersey Securities Bureau and SEC Charges, Stock Tumbles 20%

The New Jersey Bureau of Securities has issued a Summary Cease and Desist Order against leading cryptocurrency exchange Coinbase, Inc. for allegedly offering unregistered securities tied to its cryptocurrency staking services. The Bureau has further levied a hefty penalty of $5 million against Coinbase.

This action was led by the New Jersey Office of the Attorney General and the Division of Consumer Affairs, aiming to enforce compliance with Securities Law. The violation pertains to Coinbase’s promotion of unregistered securities to New Jersey residents through their staking services. However, this order does not prevent Coinbase from offering staking services, as long as it aligns with New Jersey law.

Staking is a process where investors commit their crypto assets for a specified period to aid blockchain transaction validation, and in return, receive additional cryptocurrency. Coinbase’s staking program, which promises returns up to 10%, is under scrutiny. Coinbase pools the investors’ crypto assets and uses a team of engineers or contracts with third-party validators to generate staking rewards. These profits are then shared with investors after Coinbase’s cut.

“Companies cannot make up their own rules in the cryptocurrency securities market. They need to properly address the risks of investing in crypto,” stated Shirley Emehelu, Executive Assistant Attorney General. Cari Fais, Acting Director of the Division of Consumer Affairs, emphasized the necessity of registering anyone selling securities in New Jersey.

Coinbase’s staking securities are not insured by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation. Over 3.5 million investors across the country, including approximately 145,270 New Jersey investors, are not shielded from loss.

This legal action is the culmination of a collaborative investigation by state securities regulators, led by California and inclusive of multiple other states.

Further, the U.S. Securities and Exchange Commission (SEC) has also charged Coinbase with operating as an unregistered securities exchange, broker, and clearing agency. This double whammy of regulatory trouble has caused a severe reaction in the market, with Coinbase’s stock price plunging more than 20%.

The Bureau reiterated its commitment to protect investors from investment fraud and ensure the regulated operation of the securities industry in New Jersey.

Gemini Responds to SEC Lawsuit Over Alleged Unregistered Securities

Cryptocurrency exchange Gemini has filed a reply brief in response to a lawsuit initiated by the United States Securities and Exchange Commission (SEC). The lawsuit, which is being heard in the U.S. District Court for the Southern District of New York, alleges that Gemini’s service, Gemini Earn, violated securities regulations by offering “unregistered securities.”

A Robust Defense

Gemini’s legal defense, represented by firms JFB LEGAL, PLLC, and SHEARMAN & STERLING LLP, has been robust. The reply brief, dated August 18, 2023, challenges the SEC’s claims, arguing that their complaint is based on “conclusory statements” and lacks concrete evidence. Specifically, Gemini’s defense has highlighted the SEC’s failure to answer pivotal questions, such as when the alleged security was sold, who were the buyer and seller, and at what price it was offered.

Gemini Earn at the Center of Controversy

The core of the lawsuit revolves around the Gemini Earn service, which facilitates customers in lending crypto assets like Bitcoin to Genesis. The SEC asserts that this service breached securities regulations. However, Gemini has consistently contested this claim. On May 27, the exchange posited that transactions within the Gemini Earn program were essentially loans, urging the SEC to dismiss the complaint based on this perspective.

Adding to the public discourse, Jack Baugham, a founding partner of JFB Legal, made a statement highlighting the inconsistent nature of the SEC’s arguments. He described the regulator’s approach as “floundering” and emphasized the contradictory facets of their claims.

Previous Legal Challenges

Earlier in the year, the legal waters were further muddied when US regulators initiated a lawsuit against both Gemini and Genesis Global Capital, alleging unregistered securities trading through the Gemini Earn program. This was compounded by accusations from investors against Gemini and its co-founders, alleging fraudulent activities.

In an official blog post, Gemini addressed the lawsuit, terming it “ill-conceived.” They underscored the clarity of “Section 5 of the securities act” and criticized the SEC for their ambiguous stance on the matter.

The Downfall of Gemini Earn

Genesis served as the primary lender for the Gemini Earn program, which once boasted an impressive annual return of over 8%. Digital Currency Group (DCG) borrowed a significant $1.65 billion from Genesis and subsequently channeled these funds primarily to Three Arrows Capital and the cryptocurrency exchange FTX. Unfortunately, both entities declared bankruptcy in 2022, leading to challenges for Gemini Earn users in retrieving their investments.

For transparency, the Gemini Earn website has been consistently updated with unfolding events. As of August 18th, the website reported that mediation sessions were held on August 16th and 17th, with Genesis extending the mediation to August 23rd. Gemini has voiced concerns over the prolonged negotiations with DCG, aiming to ensure fair compensation for Genesis’s creditors, including Earn users. DCG defaulted on a payment of $630 million due to the Genesis bankruptcy estate between May 9th and 11th.

Despite facing a motion by DCG and its CEO, Barry Silbert, to dismiss a lawsuit alleging them of fraud, Gemini claims to remain steadfast in its stance. They are set to respond to this motion by September 14th. On a positive note, Genesis has brokered a settlement agreement with the FTX estate, reducing FTX’s claim from $3.7 billion to $175 million against Genesis, promising better recoveries for all affected creditors.

Debt Box vs SEC: Court Reverses Asset Freeze, Raises Questions on SEC's Conduct

The United States Securities and Exchange Commission (SEC) has filed a complaint against Debt Box and other defendants, alleging that the firm was engaged in a fraudulent conspiracy to offer unregistered securities to investors. The action is being brought against Debt Box and other defendants. In August of 2023, the Securities and Exchange Commission (SEC) won a temporary asset freeze and restraining order against Debt Box, its four proprietors, and thirteen additional defendants. The SEC said that the scam was responsible for the raising of about fifty million dollars, in addition to undefined sums of Bitcoin and Ether. According to the Securities and Exchange Commission (SEC), Debt Box was accused of selling “node licenses” that were represented as a mechanism to earn crypto asset tokens via mining operations. However, the SEC said that these “node licenses” were, in fact, a counterfeit.

Concerns Regarding the SEC’s alleged misrepresentation

A federal court in Utah overturned the asset freeze on November 30, 2023, citing the fact that the Securities and Exchange Commission had misrepresented facts as the reason for the decision. This was a momentous turn of events. As the Securities and Exchange Commission (SEC) had claimed, the court determined that Debt Box did not freeze bank accounts or seek to relocate to the United Arab Emirates. According to the court, a transfer of $720,000 that the Securities and Exchange Commission (SEC) alleged was moved abroad was, in fact, made inside the United States.

The Motion to Dismiss filed by Debt Box

Following the disclosure of this information, Debt Box submitted a request on December 4 to dismiss the case. In their motion, they said that the SEC “got this case wrong” and that they should not be permitted to proceed with what they consider to be a false narrative against them. The attorneys for Debt Box have accused the Securities and Exchange Commission of not meeting fundamental pleading requirements and of misrepresenting the current position of the law in relation to crypto assets.

The Response of the Judge and the Possibility of Sanctions: The United States District Judge Robert Shelby reprimanded the lawyers for the Securities and Exchange Commission for allegedly utilizing “false and misleading” arguments in order to persuade the court to freeze the assets of Debt Box. He issued a warning that the lawyers for the Securities and Exchange Commission (SEC) would be subject to penalties for their behavior, which he said had resulted in irreparable damage to Debt Box and destroyed the credibility of the legal processes. In the realm of civil law, sanctions often take the form of monetary penalties. It has been handed to the SEC by Judge Shelby that they have two weeks to reply to his findings.

Initial Complaint Filed by the SEC

In the beginning, the Securities and Exchange Commission (SEC) filed a lawsuit against Debt Box in July 2023. The SEC claimed that the company and its partners had engaged in unregistered securities sales and had violated antifraud provisions of federal securities laws. The case filed by the Securities and Exchange Commission (SEC) sought civil fines, permanent injunctive relief, and the restoration of claimed ill-gotten riches.

SEC Ties Terraform Ruling to Binance in Securities Violations and Deceptive Practice Case

The US Securities and Exchange Commission (SEC) filed a motion on January 3, 2023, in the US District Court for the District of Columbia. This filing highlighted parallels between its case against Terraform Labs, its co-founder Do Kwon, and its enforcement action against Binance, Binance.US, and Changpeng Zhao, Binance’s former CEO.

The SEC’s filing drew attention to a December 28 ruling against Terraform Labs and Do Kwon by Judge Jed Rakoff. In this ruling, Judge Rakoff sided with the SEC, determining that specific tokens involved in the alleged Terraform fraud were securities. This was based on the fact that they are investment contracts and the offers and sales of UST constituted an investment contract.

The SEC emphasized the relevance of Judge Rakoff’s analysis of Terraform’s ‘stablecoin’ UST to its case against Binance’s ‘stablecoin’ BUSD, and Binance’s staking-as-a-service, BNB Vault, and Simple Earn programs. This connection was highlighted in the January 3 filing, suggesting that the Terraform Labs judgment could provide “further grounds” for Judge Amy Jackson to consider denying a motion to dismiss from Binance.

The charges against Binance and Zhao include operating unregistered exchanges, broker-dealers, and clearing agencies; misrepresenting trading controls and oversight on the Binance.US platform; and the unregistered offer and sale of securities. The SEC alleges that while Zhao and Binance claimed that US customers were restricted from transacting on Binance.com, in reality, high-value US customers continued trading on the platform. Furthermore, Binance.US was purportedly independent but was allegedly secretly controlled by Zhao and Binance.

SEC Chair Gary Gensler accused Zhao and Binance of engaging in an “extensive web of deception,” involving conflicts of interest, lack of disclosure, and evasion of the law. The SEC’s complaint alleges that since at least July 2017, Binance.com and Binance.US, under Zhao’s control, operated as exchanges, brokers, dealers, and clearing agencies, generating at least $11.6 billion in revenue from US customers.

The SEC also charged Binance for the unregistered offers and sales of BNB, BUSD, and crypto-lending products, as well as BAM Trading with the unregistered offer and sale of Binance.US’ staking-as-a-service program. The complaint noted that Binance secretly controls assets staked by US customers in BAM’s staking program.

The Terraform Labs and Binance cases are part of a series of SEC enforcement actions in 2023 alleging platforms offered unregistered securities. These actions also involve lawsuits against Coinbase, Ripple, Kraken, and others, indicating a broader regulatory focus on the cryptocurrency sector.

Genesis Agrees to $21 Million SEC Settlement in Bankruptcy Resolution Effort

Genesis Global has reached a pivotal $21 million settlement with the U.S. Securities and Exchange Commission (SEC) over the Gemini Earn lending program, highlighting a critical move towards resolving allegations of unregistered securities sales. This settlement, which is scheduled for a hearing on February 14th, aims to address and put to rest the SEC’s charges that Genesis, in collaboration with Gemini, engaged in activities that contravened U.S. securities laws between February 2021 and November 2022. This period was notably marked by Genesis halting withdrawals on its platform in November 2022, due to liquidity issues that were exacerbated by the market’s volatility and the fallout from the collapse of FTX, leading to Genesis filing for bankruptcy in January 2023.

The agreement to settle for $21 million is a strategic decision by Genesis to mitigate the financial and legal uncertainties it faces amidst ongoing legal challenges and its bankruptcy proceedings. Notably, Genesis has not admitted to any wrongdoing as part of this settlement agreement, a common stipulation in such settlements which allows companies to resolve disputes without a formal admission of guilt.

This settlement comes at a time when the SEC is intensifying its scrutiny of the cryptocurrency sector, with ongoing lawsuits against other major crypto firms, reflecting the regulatory body’s commitment to enforcing U.S. securities laws in the rapidly evolving digital assets space. The SEC’s actions, including this settlement with Genesis, underscore the regulatory challenges crypto firms face in navigating compliance with existing securities laws.

The Genesis settlement is particularly significant as it not only aims to resolve the SEC’s lawsuit but also enables Genesis to focus on its bankruptcy restructuring efforts, including repaying its customers and other creditors. This move is indicative of the broader regulatory and financial pressures facing the crypto industry, as companies navigate compliance, market volatility, and the complexities of U.S. securities laws.

In conclusion, the Genesis and SEC settlement marks a crucial development in the crypto regulatory landscape, serving as a reminder of the legal obligations and challenges crypto firms face. As Genesis moves forward with its bankruptcy proceedings, the outcome of this settlement could provide insights into the future regulatory environment for digital assets and the potential pathways for crypto firms in addressing legal and financial challenges.