SEC Charges Cenesis and Gemini

The Securities and Exchange Commission (SEC) has recently announced charges against Genesis Global Capital and Gemini Trust Company for offering securities to retail investors without proper registration through their crypto lending program called Gemini Earn. According to the SEC, the two companies raised billions of dollars worth of crypto assets from hundreds of thousands of investors without proper registration. The SEC’s investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.

It is reported that in December 2020, Genesis, a subsidiary of Digital Currency Group, entered into an agreement with Gemini to offer their customers, including retail investors in the United States, an opportunity to loan their crypto assets to Genesis in exchange for interest payments. The program, called Gemini Earn, was launched in February 2021, and it allowed retail investors to lend their crypto assets to Genesis through Gemini acting as the facilitator of 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 had discretion in how to use investors’ crypto assets to generate revenue and pay interest to Gemini Earn investors.

The SEC’s complaint alleges that in November 2022, Genesis announced that it would not allow its Gemini Earn investors to withdraw their crypto assets due to insufficient liquid assets following volatility in the crypto 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 further alleges that the Gemini Earn program constitutes an offer and sale of securities under applicable law and should have been registered with the Commission. SEC Chair Gary Gensler stated that they have alleged that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors. He added that the 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 the SEC’s time-tested securities laws.

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(c) of the Securities Act of 1933. The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties.

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