US action on unlicensed crypto-asset earn product
The US Securities and Exchange Commission (SEC) has charged Genesis Global Capital LLC (Genesis) and Gemini Trust Company LLC (Gemini) on the basis that they engaged in unregistered offer and sale of securities to US retail investors through the Gemini Earn Program. The SEC confirmed the charge in a press release dated 12 January 2023.
This is not the first time the SEC has challenged a crypto lending platform. In February 2022, the SEC charged BlockFi Lending LLC for engaging in an unregistered offer and sale of securities and operating as an unregistered investment company in relation to its BlockFi Interest Account product.
The SEC’s action is consistent with enforcement action commenced by ASIC against crypto-asset lending programs offered by Block Earner and Finder Wallet. We reported on the ASIC proceedings against Block Earner in a previous article.
Gemini Earn Program
According to the SEC’s claim, Genesis was the issuer, and received, pooled, deployed and paid interests on the investors’ assets. Both Genesis and Gemini marketed the product, and Gemini provided retail investors with access to Genesis, which otherwise only engaged in crypto-asset transactions with large institutional and other accredited investors (broadly equivalent to a wholesale investor in Australia).
The Gemini Earn Program involved investors entering into a tri-party loan agreement to loan their crypto-assets to Genesis, with Gemini acting as the agent for retail investors to facilitate the transaction (Gemini Earn Agreements). Genesis pooled crypto-assets from Gemini Earn investors with assets from other investors and earned revenue primarily by lending the crypto-assets to institutional counterparties.
Genesis and Gemini had full control over the net return to investors as:
- Genesis agreed to pay investors in-kind interest on the crypto-assets they had invested, however Genesis could unilaterally revise the interest rates on a monthly basis; and
- Gemini would deduct an agent fee from the interest receivable from Genesis. Gemini had sole discretion over its agent fee.
The Gemini Earn Program was marketed to the general public as an investment product.
The SEC takes the position that the Gemini Earn Program constituted an offer and sale of securities, either because the Gemini Earn Agreements were ‘notes’ or ‘investment contracts’, and therefore should have been registered with the SEC.
Application in Australia
If the Gemini Earn Program was offered in Australia, it is likely that ASIC would also seek enforcement action. We consider that ASIC would take the position that:
- the offer and sale of the Gemini Earn Agreements would either be classified as a ‘debenture’ or a ‘managed investment scheme’, both of which are financial products.
- an Australian financial services licence or appropriate authorisation from an AFS licence holder would be required to provide financial product advice and deal in the financial product.
- as the financial products were sold to retail investors, disclosure and DDO requirements would need to be complied with. Where the Gemini Earn Program is found to be a managed investment scheme, the scheme would also need to be registered.
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