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Linus Financial, a cryptocurrency platform based in Nashville, has resolved its legal conflict with the SEC through an out-of-court agreement. The platform had previously provided pooled investment opportunities in cryptocurrency to its users in exchange for fiat currency.
However, the company voluntarily ceased its operations after a similar entity faced regulatory issues with the securities authority regarding a nearly identical offering.
Unregistered Securities Offering
Numerous recent lawsuits from the SEC – with the most notable being the case against Ripple – have concentrated on the sale of tokens that the agency contends should be regarded as securities. In this instance, the Commission identified the interest-earning accounts themselves as the source of contention.
As stated in a press release from the U.S. regulator, Linus Interest Accounts were “offered and sold as securities and did not qualify for an exemption from SEC registration.”
To be classified as a security, a financial product must meet the criteria of the Howey Test, which designates it as a financial investment with a reasonable expectation of profit from a common enterprise based on the efforts of others. Since Linus’ users only needed to purchase an investment account to benefit from the firm’s trading services, the SEC determined that the accounts in question met the criteria for securities.
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No Penalties Due to Cooperation
Fortunately for Linus Financial, the SEC has opted to refrain from imposing penalties for the unregistered offering in exchange for a cease-and-desist order signed by the cryptocurrency platform.
Stacey Bogert, the Associate Director of the SEC’s Enforcement Division, indicated that the SEC’s approach should motivate other companies in the sector to cooperate when necessary.
“The SEC will continue to hold companies accountable for failing to comply with federal securities laws. But we also want to encourage companies to cooperate and take prompt corrective action when problems arise. Today’s settlement provides a valuable message to other market participants about the importance of cooperation and remediation.”
Linus Financial, which had been providing these accounts since March 2020, ceased its operations in late March 2022, shortly after the SEC announced charges against an unnamed crypto asset investment product similar to its own.
At that time, Linus voluntarily halted the sale of accounts to new users and advised existing users to wind down and close their accounts within a month.
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