The Consequences of Unregistered Securities

The Securities and Exchange Commission (SEC) recently announced charges against Gemini Trust Company, LLC—a cryptocurrency exchange—and Genesis Global Capital, LLC—a cryptocurrency lender—for selling unregistered securities. Many companies, particularly in the crypto industry, which is still widely unregulated, think that the SEC regulations that cover private equity markets are avoidable. As these companies and many others have learned, this isn’t the case. 

The only way to legally sell securities not registered with the SEC is through an exemption, such as rule 506(c). With rule 506(c) offerings, investors can prove their accredited status by attaining an accredited investor status certificate. If your company is looking to raise capital through a 506(c) offering, discover how to verify accredited investors to stay compliant with SEC regulations and avoid the cumbersome process of registering securities.

The charges against Gemini and Genesis highlight the importance of compliance with SEC regulations for all companies selling securities, including crypto companies.

So, what led to these charges, and why is compliance so important?

What Happened?

According to the SEC’s order, both Gemini and Genesis sold securities without registering them as required by federal securities laws. This means that Gemini and Genesis were allegedly offering investments without properly informing their customers of any potential risks involved.

It happened like this: In December 2020, Gemini and Genesis partnered to offer Gemini customers an opportunity to loan their crypto to Genesis in exchange for interest. The program, called Gemini Earn, launched in early 2021, touting up to 8% interest for Gemini users who loaned their crypto to Genesis. Genesis then loaned it out and split the profits with Gemini users, but not before Gemini deducted an agent fee, sometimes as high as 4.29%, from the returns.  

According to the SEC, these transactions qualified as investment contracts and notes, which is how the agency assesses whether an offering is a security.

The Consequences

The SEC is currently seeking permanent injunctive relief, disgorgement, and civil penalties against both Genesis and Gemini as both companies are considered liable. It also stated that it will continue to investigate any other entities or persons involved and other securities law violations.

In a public statement, SEC Chair Gary Gensler said, “Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws. Doing so best protects investors. It promotes trust in markets. It’s not optional. It’s the law.”

As of early 2023, the Gemini Earn program has ended. However, Genesis has yet to allow customers of the Earn program, more than 340,000 investors, to withdraw their funds, a move that began in November after the crash of FTX. This sparked a major controversy between the two companies that has only intensified with the charges brought forth by the SEC.

Why Compliance Is So Important in Private Equity

Gemini Trust Company and Genesis Global Capital’s run-in with the SEC highlights just how important compliance is for companies involved in private equity investments. Without proper adherence to all applicable laws and regulations governing these types of investments, customers could find themselves at risk for fraud or other illegal activities involving their funds and companies could face serious consequences, such as fines or penalties.