The Consequences of Unregistered Securities: SEC v. Mango Markets The Importance of Registering Securities with the SEC
VerifyInvestor.com
Securities — any “fungible, negotiable financial instrument that holds some type of monetary value” — must be registered with the Securities and Exchange Commission (SEC). Exemptions exist, such as Rule 506(c) of Regulation D. Generally speaking, before a security can be promoted, sold, or traded, it must be registered or issued pursuat to an exemption from the registration requirement. Failing to register a security carries some pretty heavy consequences, as we will discuss more fully below. Among them, however, is this: selling or attempting to sell unregistered securities is a felony.
Why have registration in the first place? What is it for?
The registration of securities with the SEC is designed to:
provide investors with important financial and background information regarding a particular security, and
protect investors from misrepresentation, fraud, and deceit.
SEC registration accomplishes these goals by requiring companies to disclose important information about their securities so investors can make informed decisions.
Further, to protect investors in today’s digital economy, what constitutes a security is not limited to stocks, bonds, or notes. As the caselaw, recent SEC litigations, and SEC enforcement actions demonstrate, digital tokens can also be securities.
Failing to register securities tokens with the SEC can have serious consequences for the companies that create those tokens and the brokers who sell them — as Mango Markets recently found out.
The Consequences of Unregistered Securities: SEC v. Mango Markets
The Charges
On September 27, 2024, the SEC filed “settled charges” (i.e., charges that were neither admitted nor denied by the defendants) against Mango DAO and two other companies, Blockworks Foundation and Mango Labs, LLC. The charges related to crypto assets (called “MNGO tokens”) that were being offered and sold as securities on the Mango Markets platform.
The Mango Markets platform is a cryptocurrency trading platform.
Mango DAO is a decentralized autonomous organization (“DAO”) that is the governing body of Mango Markets. Decentralized autonomous organizations are entities that use blockchain technology to democratize tokens by giving all members of the DAO voting rights. Instead of having a centralized authority, the DAO gives all of its members authority to govern the organization.
The “MNGO tokens” were the “governance tokens” of Mango Markets.
Blockworks Foundation and Mango Labs, LLC, were responsible for the development and operation of Mango Markets.
According to the SEC, despite using blockchain technology, Mango DAO, Blockworks Foundation, and Mango Labs, LLC (collectively “defendants”) were engaged in typical securities market activities. None of the defendants were registered with the SEC. Beginning sometime in August 2021, the defendants raised more than $70 million on the Mango Markets platform from the unregistered offer and sale of 500 million MNGO tokens worldwide — including sales to U.S. investors.
The SEC also alleged that, as part of the offer and sale of the MNGO tokens, Blockworks Foundation and Mango Labs, LLC performed typical securities broker activities without being registered with the SEC as brokers. According to the SEC’s complaint, through their operation of the Mango Markets platform, Blockworks Foundation and Mango Labs, LLC:
actively solicited and recruited users of Mango Markets to trade the MNGO tokens,
provided advice and valuations regarding the merits of potential investment, and
helped facilitate securities transactions on the Mango Markets platform by assisting customers in opening accounts and regularly handling customer funds and securities.
The SEC alleges in its complaint that by engaging in the offer and sale of unregistered securities, the defendants “deprived investors of critical protections” of the securities laws.
Using an exemption such as Rule 506(c) mentioned previously, would evidence that you are offering securities legally. Outside of compliance obligations covered by this exemption, another major benefit is the ability to general solicit investors, helping grow your fund. Of course, these exemptions have rules to pay attention to, such as the necessity of verifying that all of your investors are accredited investors.
The SEC Settlement Agreement
As noted above, in the settlement agreement, the defendants neither admitted nor denied the SEC’s allegations. Nevertheless, defendants agreed to:
collectively pay nearly $700,000 in civil penalties
destroy their MNGO tokens
request the removal of MNGO tokens from trading platforms
refrain from soliciting any trading platform to allow trading in or offering or selling MNGO.
In a statement accompanying the announcement of the settlement, Jorge G. Tenreiro, Acting Chief of the Crypto Assets and Cyber Unit, said:
“Since the inception of our crypto enforcement program, our view has been that the label ‘DAO’ does not change the reality of who is behind a project, what activities they engage in, or whether their activities need to be registered. Nor does engaging in intermediation of securities with the aid of automated or open source software change the nature of such activities. If you engage in securities-intermediary functions, you must register or be exempt from doing so, regardless of the technology employed and the type of legal entity used.”
The SEC’s position is pretty clear. They don’t care what you call it or what technology you use, if you engage in securities transactions, you need to register with them.
Mango Markets and CFTC Charges
The settlement with the SEC for failing to register securities follows closely on the heels of a $500,000 proposed settlement between Mango Markets and the Commodity Futures Trading Commission (CFTC) to resolve charges that Mango Market’s Discord server, the decentralized exchange (DEX) failed to resister as a commodities exchange, illegally offered services to customers in the U.S., and failed to implement Know Your Customer (KYC) procedures and protocols.
It also follows the conviction of Avi Eisenberg for fraud and market manipulation arising out of $110 million that Eisenberg stole from Mango Markets in October 2022 by making three massive perpetual future trades of MNGO between himself, then tricking the system into letting him “borrow” $110 million in various cryptocurrencies. Eisenberg is currently facing 20 years in jail.
Protecting investors is the primary aim of the securities laws. Whether they are traditional or digital, securities must be registered with the SEC. Equally important, almost all investments require that investors be accredited, and that issuers take reasonable steps to verify accredited investors. VerifyInvestor.com makes verifying accredited investors easy, cost-effective, secure, and reliable. Our accredited investor verification services, (which also include qualified purchaser and qualified client verification), allow investors to receive an accredited investor certificate. We also provide AML/KYC services. Participation in our accredited investor verification program is easy. We help companies fully and easily comply with their legal obligations to verify accredited investors.