SEC Crypto Investigations Explained

What to Do if the U.S. Securities and Exchange Commission Is Targeting Your Cryptocurrency Company

The U.S. Securities and Exchange Commission (SEC) has made investigating cryptocurrency and other cryptocurrency companies a top enforcement priority in recent years. While cryptocurrencies are not subject to the same level of SEC oversight as listed securities, cryptocurrency companies must still be careful to avoid crossing boundaries that could lead to allegations of federal securities law violations. This includes not only the prohibition on marketing a cryptocurrency as a security, but also the prohibition on marketing cryptocurrency-related securities (i.e., the shares of cryptocurrency companies) to non-accredited investors.

The SEC is aggressively targeting cryptocurrency companies based in the United States and abroad. This includes cryptocurrency companies and decentralized autonomous organizations (DAOs), and it includes companies in the United States and overseas. We are seeing SEC Enforcement Division investigations targeting a wide range of statutory and regulatory violations, and we expect that the SEC will continue to vigorously enforce cryptocurrency companies’ compliance obligations in the months and years to come.

Recent U.S. Securities and Exchange Commission Enforcement Actions Targeting Cryptocurrency Companies

The SEC’s recent enforcement efforts targeting cryptocurrency companies provide some valuable insights into the Commission’s enforcement priorities. They also shed light on the types of compliance violations that cryptocurrency companies need to avoid. With this in mind, some examples of recent SEC enforcement actions targeting cryptocurrency companies include:

• SEC v. BlockFi Lending LLC – The SEC charged BlockFi Lending LLC with failing to register the securities offered through its crypto lending platform as well as its crypto lending platform itself.
• SEC v. Digital World Acquisition Corp. – The SEC charged Digital World Acquisition Corp. with “material misrepresentations” in connection with a special purpose acquisition company (SPAC) transaction.
• SEC v. Forsage – The SEC charged Forsage with operating an unregistered offering and sale of crypto asset securities as well as a Ponzi scheme.
• SEC v. Poloniex, LLC – The SEC charged Poloniex, LLC with failing to register a digital asset trading platform.
• SEC v. Ripple Labs, Inc. – The SEC charged Ripple Labs, Inc. with raising more than $1.3 billion through an unregistered securities offering.
• SEC v. Sparkster, Ltd. – The SEC charged Sparkster, Ltd. with raising $30 million through an unregistered securities offering.

As these are just a few examples, this list is by no means exclusive. Cryptocurrency companies of all different types have faced SEC scrutiny in recent years, and the SEC has targeted a broad range of statutory and regulatory violations.

1. Why Is the SEC Targeting Your Cryptocurrency Company?

When facing an SEC investigation, one of the first steps toward building a defense strategy is determining why the SEC’s Enforcement Division is targeting your company. Did someone file a complaint? Did the SEC identify apparent statutory or regulatory violations on its own? Is the SEC trying to make an example out of your company and others like it? These are all possible scenarios, and knowing why the SEC is targeting your company is an important part of defending against the investigation effectively.

2. What Specific Allegations is the SEC Investigating?

In most cases, knowing why the SEC is targeting your company is not enough. You also need to know what specific allegations the SEC is investigating. The SEC enforces a broad range of statutory and regulatory prohibitions, and each of these prohibitions presents its own unique risks and challenges for defense.

3. What Is the True Nature of the SEC’s Investigation?

One thing to keep in mind is that the SEC may not disclose the true nature of its investigation. While the SEC is required to state why it is issuing a subpoena or civil investigative demand (CID), it will often do so in vague terms. For example, it is not uncommon for the SEC to simply say that it is investigating “potential violations of the federal securities laws.” However, as discussed above, the federal securities laws are broad in scope, and they contain provisions that are of particular interest for cryptocurrency companies.

4. At What Stage is the SEC’s Investigation?

It is also important to determine at what stage the SEC’s investigation currently stands. Is the SEC issuing a subpoena or CID for the first time, or is this a follow-up to a prior demand for information? Has the SEC simply reached out to request information from your company, or is the Enforcement Division already fairly deep into its investigation? Knowing at what stage the SEC stands will determine the next steps that are necessary for building a strategic and effective defense.

5. Are Any Other Federal Authorities Involved?

Along with understanding the SEC’s role in the investigation, it is important to determine whether any other federal authorities are involved as well. For example, the U.S. Department of Justice (DOJ) and Internal Revenue Service Criminal Investigation (IRS-CI) unit are both actively investigating cryptocurrency companies as well. While the SEC can impose both civil and administrative penalties for statutory and regulatory violations, if the DOJ or IRS-CI is involved, then your company could be at risk for federal criminal prosecution as well.

6. What Federal Statutes and Regulations Are At Issue?

What federal statutes and regulations are at issue in the SEC’s investigation? Companies targeted in SEC investigations need to know what statutes and regulations they are being accused of violating in order to build their defenses accordingly. This requires an in-depth understanding of the relevant statutes and regulations, and it requires companies to focus on the specific elements of the prohibitions at issue. While a finding that a violation has occurred in the past can have significant implications for the future, in order to reach this finding the SEC must prove that all elements of the relevant statute or regulation are satisfied.

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7. What Federal Statutes and Regulations Are At Issue?

Due to the unique nature of cryptocurrencies and the rapid growth in their popularity, not all of the federal securities statutes and regulations that apply to cryptocurrency companies are widely known. While most companies are aware of the prohibition on conducting unregistered securities offerings, for example, many are unaware of the prohibition on offering securities to non-accredited investors. As a result, understanding the scope and nature of the SEC’s investigation will often require companies to work with their defense counsel on a custom-tailored basis to determine what statutes and regulations are at issue. This is true for both cryptocurrency companies and DAOs organized in the U.S. and abroad.

What Types of Cryptocurrency Companies Does the SEC Investigate?

The SEC investigates all types of cryptocurrency companies, both in the U.S. and abroad. This includes cryptocurrency coin and token companies, cryptocurrency exchanges, and other companies and organizations working in the cryptocurrency space. The SEC is particularly focused on companies that it suspects of violating securities laws by selling unregistered coins and tokens to unaccredited investors.

What Are the Risks of Being Targeted in an SEC Investigation?

The risks of being targeted in an SEC investigation can be substantial. The SEC can pursue both civil and administrative enforcement actions for violations of federal securities laws, and this includes the laws that are relevant to cryptocurrency companies. Additionally, in many cases, the SEC works collaboratively with other federal agencies, and this means that cryptocurrency companies targeted in SEC investigations can face the risk of criminal prosecution as well.

When Can the SEC Investigate a Cryptocurrency Company?

The SEC can investigate a cryptocurrency company any time it believes that a federal securities law violation has occurred—or is occurring. The SEC can uncover evidence of statutory and regulatory violations in a variety of different ways, from analyzing companies’ publicly-available information to relying on insider tips. Depending on the circumstances involved, the SEC can initiate an investigation without the target’s knowledge, and it can conduct an investigation without the need to file formal charges.

How Can I Find Out Why the SEC Is Targeting My Cryptocurrency Company?

If your cryptocurrency company has been contacted by the SEC’s Enforcement Division, you will need to engage legal counsel to determine why. In most cases, being contacted by the SEC means that the SEC is already in the process of investigating your company. Your company’s defense counsel can intervene in the SEC’s investigation and communicate with the SEC’s Enforcement Division attorneys to determine what your company needs to do to avoid unnecessary exposure.

What Should I Do if My Cryptocurrency Company is Being Investigated By the SEC?

If your cryptocurrency company is being investigated by the SEC, you should engage defense counsel promptly. You will need to work closely with your company’s defense counsel to ensure that you are making informed decisions at every step along the way. If your company has violated the federal securities laws, its defense counsel will need to mitigate the consequences of the violation by working with the SEC’s Enforcement Division attorneys to achieve a favorable outcome.

Speak with a Senior SEC Defense Lawyer at Spodek Law Group

If you would like to know more about how our attorneys defend cryptocurrency companies in SEC enforcement matters, we invite you to get in touch. Call 212-300-5196 or contact us online to arrange a complimentary consultation today.

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