On July 21, 2022, the Securities and Exchange Commission (“SEC”) announced insider trading charges in connection with an action it filed against Ishan Wahi, a former Coinbase manager, Nikhil Wahi, and Sameer Ramani, in the U.S. District Court, Western District of Washington, Seattle Division, “for perpetrating a scheme to trade ahead of multiple announcements regarding certain crypto assets that would be made available for trading on the Coinbase platform.” See Press Release, available here. This is a significant action filed against Coinbase, which has more than 100 million verified users in over 100 countries on its crypto asset trading platform.[1]
As per the press release, the SEC is “not concerned with labels, but rather the economic realities of an offering…those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase.” (internal quotation marks omitted)
Noteworthy in the SEC Complaint, which seeks relief for violations of section 10(b) of the Exchange Act and Rule 10b-5, is how the SEC refers to a “crypto asset security”. SEC Complaint at ¶ 3; pp. 59-61. The SEC refers to a crypto asset security as “an asset that is issued and/or transferred using distributed ledger or blockchain technology – including, but not limited to, so-called ‘digital assets,’ ‘virtual currencies,’ ‘coins,’ and ‘tokens’ – and that meets the definition of ‘security’ under the federal securities laws.” Id. As per the SEC Complaint, “[a] digital token or crypto asset is a crypto asset security if it meets the definition of a security, which the Securities Act defines to include ‘investment contract,
i.e., if it constitutes an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.” Id. at ¶ 24. With this definition, the SEC refers to nine crypto asset securities which Ishan Wahi provided material, nonpublic information on, id. at ¶ 24, including “POWR” (id. at ¶ 8), “AMP” (id. at ¶ 39), “RLY” (id. at 45), and “DDX” (id. at ¶ 50). The SEC Complaint can be accessed here.
The key here may be whether the District Court sees these nine crypto assets as securities, as “[t]he Securities Act prohibits the offer as well as the sale of unregistered, non-exempt securities.”[2]
This SEC action against Coinbase comes just months after the SEC’s announcement that it was nearly doubling the size of its newly renamed “Crypto Assets and Cyber Unit”.[3] This SEC action against Coinbase comes just months after the SEC’s announcement that it was nearly doubling the size of its newly renamed “Crypto Assets and Cyber Unit”. It also comes as the SEC is seeking to ensure that digital asset platforms such as Coinbase offer protections similar to those seen in such exchanges as the New York Stock Exchange, specifically by getting these platforms registered and regulated and seeking to ensure that certain crypto tokens are registered as securities.[4]
In addition to the SEC action filed against these three individuals, the U.S. Attorney’s Office of the Southern District of New York has indicted them for conspiracy to commit wire fraud and wire fraud. The indictment can be accessed here.
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[1] “About Coinbase”, Coinbase (August 11, 2022), https://www.coinbase.com/about.
[3] Press Release, U.S. Securities and Exchange Commission, SEC Nearly Doubles Size of Enforcement’s Crypto Assets and Cyber Unit (May 3, 2022), https://www.sec.gov/news/press-release/2022-78 (the “Crypto Assets and Cyber Unit” was previously known just as the “Cyber Unit”).
[4] U.S. Securities and Exchange Commission, Office Hours with Gary Gensler, What Are Crypto Trading Platforms? (July 28, 2022), https://www.youtube.com/watch?v=aWl55tTZ50Q.
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