Coinbase and the SEC - (Un)registered…

The SEC continues to grapple with the idea that cryptocurrencies are securities. Coinbase, the crypto trading platform, is the latest company involved in the cryptocurrency debate with the SEC.

A former Coinbase employee was just recently charged with wire fraud for buying coins with his brother, knowing they would soon be available for trade on the Coinbase platform. Together, with a friend, they traded 25 coins to the tune of a $1.5 million dollar profit.

In a related action on the same day, the U.S. Securities and Exchange Commission (SEC) charged the Coinbase employee, his brother, and his friend for insider trading of securities. Around the same time, Coinbase revealed that the SEC had been probing it to determine whether Coinbase had improperly listed and allowed trading of securities on its platform.

Why is this a problem? Companies that fail to register securities with the SEC for the public or fail to find an exemption, such as a proper private placement, violate SEC Regulations. Depending on the results of the probe, Coinbase could face penalties and have to go through the rigorous process of filing with the SEC as a securities exchange.

The Great Debate

In response to the SEC’s claim, Coinbase has stated that cryptocurrencies are not securities and that the platform does not list any securities. Additionally, the company is asking for greater clarity around the rules and regulations for crypto assets.

It’s not just the SEC having a hard time putting cryptocurrencies into categories. Recently, a new bill for cryptocurrency regulation hit the floor of the Senate. It classifies digital assets as commodities, not securities, which would put the Commodity Futures Trading Commission (CFTC) in charge of overseeing them, not the SEC.

“Are cryptocurrencies securities or not?” is clearly an important question to ask. What if some coins act like securities and others don’t? A blanket term might not work when it comes to crypto.

The investigation into Coinbase is ongoing and will determine how regulators will treat crypto in the future.

Staying compliant with the SEC is critical for public and private companies alike. Attempting to skirt the law is common but comes with severe penalties. There are legal exemptions from registering with the SEC, such as Regulation A, Regulation D, and Regulation S, that companies offering securities can take advantage of. In addition, thanks to the JOBS Act, which enacted Rule 506(c), private companies can solicit investments publicly while conducting an SEC-compliant private offering.  Each of these exemptions has various advantages and limitations as well, but Rule 506(c) has certain advantages that make it extremely popular. Rule 506(c) is very popular as it allows for the general solicitation of investors, making fundraising much easier, as long as the company takes “reasonable steps” to verify their investors as accredited investors.