(Kitco News) - The Securities and Exchange Commission has 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 according to a press release from the regulator.
“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,” the release said.
The complaint from the SEC alleges that Genesis entered into an agreement with Gemini in December 2020 to offer Gemini customers, which include retail investors in the U.S., the opportunity to loan their crypto assets to Genesis for attractive yields.
The Gemini Earn program was opened to investors beginning in February 2021, “whereby Gemini Earn investors tendered their crypto assets to Genesis, with Gemini acting as the agent to facilitate the transaction.” Gemini took out an agent fee from the returns Genesis paid to Gemini Earn investors.
The complaint alleges that “Genesis then exercised its discretion in how to use investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors.”
After FTX declared bankruptcy in November 2022, Genesis announced that it was halting all withdrawals, which prevented Gemini Earn investors from being able to reclaim their crypto assets as “Genesis lacked sufficient liquid assets to meet withdrawal requests following volatility in the crypto asset market.”
Genesis reportedly “held approximately $900 million in investor assets from 340,000 Gemini Earn investors” at the time it halted withdrawals. Gemini has since terminated the Earn program and Gemini Earn retail investors have still not been able to withdraw their crypto assets.
The complaint filed by the SEC 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 SEC’s complaint was filed in the U.S. District Court for the Southern District of New York and charges Genesis and Gemini with violations of Sections 5(a) and 5(c) of the Securities Act of 1933. The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties.
Update:
After the SEC announced its charges, Gemini co-founder Tyler Winklevoss posted a response on Twitter saying “It’s disappointing that the SEC chose to file an action today as Gemini and other creditors are working hard together to recover funds. This action does nothing to further our efforts and help Earn users get their assets back. Their behavior is totally counterproductive.”
According to Winklevoss, the Earn program was being regulated by the New York Department of Financial Services and the exchange had been cooperating with the SEC about the program for more than 17 months. “They never raised the prospect of any enforcement action until AFTER Genesis paused withdrawals on November 16th.”
“Despite these ongoing conversations, the SEC chose to announce their lawsuit to the press before notifying us. Super lame,” Winklevoss tweeted. “It’s unfortunate that they’re optimizing for political points instead of helping us advance the cause of 340,000 Earn users and other creditors.”
In conclusion, the Gemini co-founder said that the exchange looks forward to defending itself “against this manufactured parking ticket,” and added that they will focus on making sure this doesn’t distract them from the important recovery work they are doing.
