The United States Securities and Exchange Commission (SEC) has filed legal action against two crypto companies, Genesis Global Capital, LLC and Gemini Trust Company, LLC, for allegedly selling unregistered security offerings to the public.
The SEC’s complaint filed in the U.S. District Court for the Southern District of New York claimed that both Gemini and Genesis violated Sections 5(a) and 5(c) of the Securities Act of 1933 through the provision of unauthorized high-yield crypto products to investors in the region.
Genesis to Tap Gemini Earn Rewards Program
According to the official press release, Genesis, a subsidiary of venture capital firm Digital Currency Group (DCG), partnered with Gemini to offer the company’s users the opportunity to loan their crypto assets to Genesis with the promise to pay interest on deposits.
Part of the deal also includes using Gemini’s “Earn” program to facilitate the transaction. Both companies launched the yield product in February 2021, allowing users to earn around 7.4% interest on the deposited crypto assets.
However, the program was suspended last November after the company suffered a massive liquidity crisis resulting from the fall of Sam Bankman-Fried crypto exchange FTX and the deepening crypto winter.
The SEC alleged that Gemini charged investors as high as 4.29%, sometimes as commission from the returns Genesis paid its users.
The financial regulator also claimed that Gemini’s earn program constitutes an offer and sale of securities under applicable law and should have been registered with the Commission. The SEC began investigating the lending program in January 2022.
“We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors. 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,” said SEC Chair Gary Gensler.
Genesis Denies Investors Access to Withdraw Funds
Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said the lack of compliance from both companies denies investors the basic information needed to enable them to understand the product offerings before making informed investment decisions.
In addition to violating securities rules, the SEC further alleged that Genesis denied investors access to withdraw their funds from the platform. The firm cited its partner’s inability to honor user withdrawal requests due to insufficient funds to carry out the operation.
At the time of the restriction in November, Genesis held crypto assets worth approximately $900 million generated from the Earn program, which belongs to 340,000 investors.
Gemini terminated the Earn program earlier this month despite its customer’s funds held on Genesis.
With the product terminated without returning the customer’s assets, a group of users filed a class action against Gemini on December 28.
The lawsuit also acknowledged the SEC’s claim of non-compliance with the securities laws.
