SEC orders US$13M in disgorgement, penalties in first decentralized finance case

The Securities and Exchange Commission (SEC) has charged two men from Florida and their Cayman Islands-based blockchain company for the unregistered sale of more than US$30 million worth of securities using smart contracts and decentralized finance technology, and for misleading investors.

The case is the SEC’s first to involve the use of decentralized finance (DeFi) technology, which is touted as a global, open-source-based alternative to the current financial system, a release from the regulator said.

The two men, Gregory Keough and Derek Acree, and their company Blockchain Credit Partners allegedly sold securities in unregistered offerings through their DeFi Money Market (DMM) business. The SEC said they used smart contracts to sell two types of digital tokens.

Keough and Acree misrepresented how the company was operating, the SEC said, after realizing that DeFi Money Market could not operate as promised. “[T]he price volatility of the digital assets used to purchase the tokens created risk that the income generated through income-generating assets would be insufficient to cover appreciation of investors’ principal,” the regulator said in the release.

The men violated anti-fraud provisions of the Securities Act, the SEC said. And because the digital tokens were offered and sold as investment contracts, they also violated securities law by conducting unregistered offers and sales of the digital assets.

The respondents didn’t admit or deny the findings, but agreed to a cease-and-desist order that includes disgorgement of US$12.8 million and penalties of US$125,000 each.

Prior to the SEC order, the men also funded the smart contracts so holders could redeem their tokens and receive all principal and interest owed, the SEC said.

“Full and honest disclosure remains the cornerstone of our securities laws — no matter what technologies are used to offer and sell those securities,” said Gurbir S. Grewal, director of the SEC enforcement division, in a statement.

“Here, the labelling of the offering as decentralized and the securities as governance tokens did not hinder us from ensuring that DeFi Money Market was immediately shut down and that investors were paid back,” said Daniel Michael, chief of the SEC enforcement division’s complex financial instruments unit.

Staff

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