The Securities and Exchange Commission (SEC) has filed a complaint against Genesis Global Capital and Gemini Trust Company for allegedly selling unregistered securities to retail investors in the US. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains, plus front-end interest and civil penalties.
Both companies raised billions of dollars by offering and selling securities to US investors through the Gemini Earn crypto asset lending program.
Gemini and Genesis: A Brief Story
Gemini, a US cryptocurrency exchange, and Genesis, a subsidiary of Digital Currency Group, teamed up in December 2020 to offer cryptocurrency lending services. The SEC says that Gemini charged a fee for its services that sometimes amounted to 4.29% of the returns paid by Genesis to investors.
In November 2022, Genesis stopped paying interest to Gemini’s clients and halted withdrawals, claiming it lacked sufficient liquid assets to fulfill withdrawal requests due to the volatility of the crypto asset market. However, at the time, Genesis held approximately more than $900 million in assets from more than 340,000 Gemini investors, who were forced to cancel the Gemini Earn program in early January without the ability to get a refund.
As a consequence, SEC Chairman Gary Gensler alleged that “Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors.” Gensler said the complaint aims to show that crypto lending platforms and intermediaries must comply with US securities laws.
Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, said the recent collapse and suspension of the Genesis program highlights the need for these platforms to comply with federal securities laws. He also called on all those affected by the Genesis program or who have information about it to contact the SEC’s Whistleblower Program.
The SEC Pushes For More Power Over Crypto Businesses
The complaint states that Genesis and Gemini were offering securities through the Gemini Earn program without registering them, violating federal securities laws. Additionally, the complaint states that the companies failed to disclose important information about the program to investors, including the risks of lending their crypto assets and the fact that the companies would be able to use the assets as they pleased without disclosing that to investors.
Furthermore, the complaint also claims that Genesis and Gemini falsely stated that the program was fully collateralized when, in reality, it was not. The SEC also claims that the companies made false statements about the value of the assets in the program.
The commission is seeking permanent injunctive relief, disgorgement of ill-gotten gains, plus front-end interest and civil penalties. The regulator also seeks to bar Genesis and Gemini from committing future securities violations —which might not be too far away for Genesis if rumors are true that it is considering bankruptcy.
The SEC said this case is a reminder that all crypto lending platforms and intermediaries need to comply with US securities laws to protect investors and ensure a fair and transparent market. As SEC Chairman Gensler stated, “It’s not optional. It’s the law.”
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