SEC Charges Genesis and Gemini for the Unregistered Offer and Sale of Crypto Asset Securities through the Gemini Earn Lending Program

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Wash­ing­ton D.C., Jan. 12, 2023 — 

The Secu­ri­ties and Exchange Com­mis­sion today charged Gen­e­sis Glob­al Cap­i­tal, LLC and Gem­i­ni Trust Com­pa­ny, LLC for the unreg­is­tered offer and sale of secu­ri­ties to retail investors through the Gem­i­ni Earn cryp­to asset lend­ing pro­gram. Through this unreg­is­tered offer­ing, Gen­e­sis and Gem­i­ni raised bil­lions of dol­lars’ worth of cryp­to assets from hun­dreds of thou­sands of investors. Inves­ti­ga­tions into oth­er secu­ri­ties law vio­la­tions and into oth­er enti­ties and per­sons relat­ing to the alleged mis­con­duct are ongoing.

Accord­ing to the com­plaint, in Decem­ber 2020, Gen­e­sis, part of a sub­sidiary of Dig­i­tal Cur­ren­cy Group, entered into an agree­ment with Gem­i­ni to offer Gem­i­ni cus­tomers, includ­ing retail investors in the Unit­ed States, an oppor­tu­ni­ty to loan their cryp­to assets to Gen­e­sis in exchange for Gen­e­sis’ promise to pay inter­est. Begin­ning in Feb­ru­ary 2021, Gen­e­sis and Gem­i­ni began offer­ing the Gem­i­ni Earn pro­gram to retail investors, where­by Gem­i­ni Earn investors ten­dered their cryp­to assets to Gen­e­sis, with Gem­i­ni act­ing as the agent to facil­i­tate the trans­ac­tion. Gem­i­ni deduct­ed an agent fee, some­times as high as 4.29 per­cent, from the returns Gen­e­sis paid to Gem­i­ni Earn investors. As alleged in the com­plaint, Gen­e­sis then exer­cised its dis­cre­tion in how to use investors’ cryp­to assets to gen­er­ate rev­enue and pay inter­est to Gem­i­ni Earn investors.

The com­plaint fur­ther alleges that, in Novem­ber 2022, Gen­e­sis announced that it would not allow its Gem­i­ni Earn investors to with­draw their cryp­to assets because Gen­e­sis lacked suf­fi­cient liq­uid assets to meet with­draw­al requests fol­low­ing volatil­i­ty in the cryp­to asset mar­ket. At the time, Gen­e­sis held approx­i­mate­ly $900 mil­lion in investor assets from 340,000 Gem­i­ni Earn investors. Gem­i­ni ter­mi­nat­ed the Gem­i­ni Earn pro­gram ear­li­er this month. As of today, the Gem­i­ni Earn retail investors have still not been able to with­draw their cryp­to assets.

The SEC’s com­plaint alleges that the Gem­i­ni Earn pro­gram con­sti­tutes an offer and sale of secu­ri­ties under applic­a­ble law and should have been reg­is­tered with the Commission.

“We allege that Gen­e­sis and Gem­i­ni offered unreg­is­tered secu­ri­ties to the pub­lic, bypass­ing dis­clo­sure require­ments designed to pro­tect investors,” said SEC Chair Gary Gensler. “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.”

“The recent col­lapse of cryp­to asset lend­ing pro­grams and the sus­pen­sion of Gen­e­sis’ pro­gram under­score the crit­i­cal need for plat­forms offer­ing secu­ri­ties to retail investors to com­ply with the fed­er­al secu­ri­ties laws,” said Gur­bir S. Gre­w­al, Direc­tor of the SEC’s Divi­sion of Enforce­ment. “As we’ve seen time and again, the fail­ure to do so denies investors the basic infor­ma­tion they need to make informed invest­ment deci­sions. Our inves­ti­ga­tions in this space are very much active and ongo­ing and we encour­age any­one with infor­ma­tion about this mat­ter or oth­er pos­si­ble secu­ri­ties law vio­la­tions to come for­ward, includ­ing under our Whistle­blow­er Pro­gram if applicable.”

The SEC’s com­plaint, filed in the U.S. Dis­trict Court for the South­ern Dis­trict of New York, charges Gen­e­sis and Gem­i­ni with vio­la­tions of Sec­tions 5(a) and 5© of the Secu­ri­ties Act of 1933. The com­plaint seeks per­ma­nent injunc­tive relief, dis­gorge­ment of ill-got­ten gains plus pre­judg­ment inter­est, and civ­il penalties.

The SEC’s inves­ti­ga­tion was con­duct­ed by Jonathan Austin and Ash­ley Sprague under the super­vi­sion of Deb­o­rah Tara­se­vich and Sta­cy Bogert. The lit­i­ga­tion will be led by Edward Reil­ly and super­vised by James Con­nor and Olivia Choe.

The SEC’s Office of Investor Edu­ca­tion and Advo­ca­cy and Enforcement’s Retail Strat­e­gy Task Force has pre­vi­ous­ly issued an Investor Bul­letin on Cryp­to Asset Inter­est-bear­ing Accounts. Investors can find addi­tion­al infor­ma­tion about cryp­to assets at Investor.gov.

The SEC’s Whistle­blow­er Pro­gram was cre­at­ed by Con­gress to pro­vide mon­e­tary incen­tives for indi­vid­u­als to come for­ward and report pos­si­ble vio­la­tions of the fed­er­al secu­ri­ties laws to the SEC. Under the pro­gram, eli­gi­ble whistle­blow­ers are enti­tled to an award between 10 and 30 per­cent of the mon­e­tary sanc­tions col­lect­ed in actions brought by the SEC and relat­ed actions brought by cer­tain oth­er reg­u­la­to­ry and law enforce­ment author­i­ties. Whistle­blow­ers can report pos­si­ble vio­la­tions anony­mous­ly. The Pro­gram pro­hibits retal­i­a­tion by employ­ers against employ­ees who pro­vide the SEC infor­ma­tion about pos­si­ble secu­ri­ties vio­la­tions. Indi­vid­u­als can reach the SEC’s Office of the Whistle­blow­er, which admin­is­ters the Whistle­blow­er Pro­gram, at (202) 551‑4790.

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