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On 12 January 2023, the U.S. Securities and Exchange Commission (“SEC”) announced that it has charged Genesis Global Capital, LLC (“Genesis”) and Gemini Trust Company, LLC (“Gemini”) over unregistered offer and sale of securities to retail investors through Gemini Earn crypto asset lending program.
The SEC’s investigation into the program revealed that…
Genesis and Gemini began offering the program to retail investors as early as February 2021. Investors in the Gemini Earn program first tendered their cryptocurrency assets to Genesis, where Gemini acted as an agent to facilitate the transactions. The assets were then pooled together and invested or lent to other institutional investors, at the discretion of Genesis over how this would be achieved, with the objective to generate revenue and make interest payments to Gemini Earn investors. Whereas Gemini made profit by charging an agent fee from the returns Genesis paid to Gemini Earn investors. In late 2022, Genesis Earn lost liquidity and Gemini Earn investors could no longer withdraw their assets invested into the program. The Gemini Earn program was structured in a way that created significant liquidity risks for retail investors and these risks were not adequately disclosed to investors.
This serves as a reminder of the regulatory landscape surrounding cryptocurrencies and related products, and the need for companies to comply with federal securities laws when offering and selling investment products to retail investors.
sec allegations
In its statements, the SEC has made two major allegations against Genesis and Gemini.
- Unregistered offer and sale of securities: While conducting ‘spot transactions’ in cryptocurrencies is generally not regulated in the United States, the product structure of the Gemini Earn program comprised a different type of transaction. According to the SEC, the Gemini Earn program was an investment product with predetermined interest rates and investment contracts, rather than a simple ‘spot transaction’. Hence, the SEC categorised the Gemini Earn program as a security, subject to federal securities laws. Thus, the offering of the program to retail investors had to be registered with the SEC or qualify for an exemption from registration. If not, it would violate federal securities laws and the SEC’s rules and regulations.
- Bypassing disclosure requirements designed to protect investors: The SEC also claimed that mandatory registration and disclosure requirements were not fulfilled. The SEC’s enforcement action against Genesis Global Capital and Gemini Trust Company included allegations that the Gemini Earn program was offered to retail investors without being registered with the SEC and without sharing the necessary disclosures required under federal securities laws.
next steps
The SEC views many crypto-related products as securities. It is expected that the SEC will be looking closely into the services and products offered in the digital assets space. It is also expected that further rules and regulations governing the crypto assets industry will be put in place to protect investors’ interests. Crypto and exchanges, as well as digital platforms that provide any advisory or trading services of crypto currencies and digital assets should take note of their ongoing disclosure requirements for customer activities. They must follow the proper registration and disclosure procedures when offering these products to investors and should keep up to date with upcoming regulatory developments.
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