Genesis and Gemini face serious SEC charges for selling unregistered Crypto Asset Securities through the Gemini Earn Lending Program.
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.
Genesis and Gemini raised billions of dollars in crypto assets from hundreds of thousands of investors through this unregistered offering. Investigations into other alleged securities law violations, as well as other entities and individuals, are ongoing.
According to the complaint, Genesis, a subsidiary of Digital Currency Group, entered into an agreement with Gemini in December 2020 to offer Gemini customers, including retail investors in the United States, the opportunity to lend their crypto assets to Genesis in exchange for Genesis’ promise to pay interest. Genesis and Gemini began offering the Gemini Earn program to retail investors in February 2021, in which Gemini Earn investors tendered their crypto assets to Genesis, with Gemini acting as an agent to facilitate the transaction.
Gemini deducted an agent fee from the returns Genesis paid to Gemini Earn investors, which could be as high as 4.29 percent. Genesis then, according to the complaint, used its discretion in how to use investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors.
According to the complaint, Genesis announced in November 2022 that it would not allow its Gemini Earn investors to withdraw their crypto assets because Genesis lacked sufficient liquid assets to meet withdrawal requests due to volatility in the crypto asset market.
Genesis held approximately $900 million in investor assets from 340,000 Gemini Earn investors at the time. Gemini’s Gemini Earn program was discontinued earlier this month. As of today, retail Gemini Earn investors are still unable to withdraw their crypto assets.
According to the SEC’s complaint, the Gemini Earn program is an offer and sale of securities under applicable law and should have been registered with the Commission.
We allege that Genesis and Gemini sold unregistered securities to the public, circumventing disclosure requirements designed to protect investors,” SEC Chair Gary Gensler said.
“Today’s charges build on previous actions to demonstrate to the market and the investing public that crypto lending platforms and other intermediaries must adhere to our time-tested securities laws.” This is the best way to protect investors. It fosters market trust. It is not an option. It’s the rule.”
“The recent collapse of crypto asset lending programs, as well as the suspension of Genesis’ program, highlight the critical need for platforms offering securities to retail investors to comply with federal securities laws,” said Gurbir S. Grewal, Director of the Securities and Exchange Commission’s Division of Enforcement. “As we’ve seen time and again, failing to do so deprives investors of the basic information they require to make informed investment decisions.”
Our investigations in this area are very active and ongoing, and we encourage anyone with information about this or other potential securities law violations to come forward, including through our Whistleblower Program, if applicable.”
The SEC’s complaint, filed in the Southern District of New York, accuses Genesis and Gemini of violating Sections 5(a) and 5(c) of the Securities Act of 1933. The complaint requests permanent injunctions, disgorgement of ill-gotten gains, prejudgment interest, and civil penalties.
Jonathan Austin and Ashley Sprague of the SEC conducted the investigation, which was overseen by Deborah Tarasevich and Stacy Bogert. Edward Reilly will lead the case, with James Connor and Olivia Choe assisting.
The Retail Strategy Task Force of the SEC’s Office of Investor Education and Advocacy and Enforcement previously issued an Investor Bulletin on Crypto Asset Interest-bearing Accounts. Investors can learn more about crypto assets by visiting Investor.gov.
Congress established the SEC’s Whistleblower Program to provide monetary incentives for individuals to come forward and report possible violations of federal securities laws to the SEC. Under the program, eligible whistleblowers can receive between 10% and 30% of the monetary sanctions collected in SEC actions and related actions brought by other regulatory and law enforcement authorities. Whistleblowers have the option of reporting potential violations anonymously.
Employers are prohibited from retaliating against employees who provide the SEC with information about potential securities violations under the Program. Individuals can contact the SEC’s Office of the Whistleblower at (202) 551-4790, which administers the Whistleblower Program.
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