$50 Million Settlement Share To Go To State Securities Regulators To Settle Unregistered Offer and Sale of Digital Asset Investments
WASHINGTON, D.C. – (February 14, 2022) – The North American Securities Administrators Association (NASAA) and the U.S. Securities and Exchange Commission (SEC) jointly announced a $100 million settlement with BlockFi Lending, LLC (BlockFi) concerning its lending products and practices. Thirty-two state securities regulators have agreed to the terms of a settlement with BlockFi to resolve its past unregistered activities. More jurisdictions are expected to follow.
In the past year, state securities regulators, coordinated through NASAA, led a multi-state working group to conduct a comprehensive review and investigation of BlockFi focused on the sale of unregistered securities to retail investors through BlockFi interest accounts (BIAs).
As alleged in the numerous state securities actions, BlockFi promoted its BIAs with promises of high returns for investors who purchased the products. BlockFi took control of and pooled its investors’ loaned digital assets, and exercised sole discretion over the pooled digital assets, including how to use those assets to generate a return and pay investors the promised interest.
BlockFi is alleged to have failed to comply with state registration requirements and, as a result, investors were sold unregistered securities in violation of state law and deprived of critical information and disclosures necessary to understand the potential risks of these lending products.
Today’s action serves to settle BlockFi’s past unregistered conduct and makes clear that firms must comply with applicable laws and regulations in order to legally offer its investments to investors. BlockFi agreed to stop selling its products in all U.S. states and territories unless and until they are registered in compliance with state and federal law.
To settle its past unregistered conduct, BlockFi has agreed to pay $50 million to NASAA member jurisdictions and $50 million to the SEC for a total settlement of $100 million. NASAA members will share equally in the settlement and the 53 U.S. jurisdictions that are members of NASAA are each able to claim a settlement of $943,396.22 after executing the appropriate consent orders.
“Compliance with the securities laws serves the dual purposes of protecting investors and facilitating responsible capital formation,” said Melanie Senter Lubin, NASAA President and Maryland Securities Commissioner. “Innovation in the capital markets is necessary for the growth and evolution of our financial system, and NASAA state securities regulators will ensure this occurs within the appropriate regulatory framework.”
“State securities regulators recognize the potential value of new technology for the benefit of Main Street investors, but this new technology needs to be balanced with appropriate laws and regulations,” said Joseph P. Borg, NASAA Enforcement Section Committee Chair and Alabama Securities Commission Director. “This settlement recognizes the important work of state securities regulators and the SEC in making sure that those who are investing their hard-earned money understand the risks and rewards of their decisions.”
On February 14, 2022, BlockFi will stop offering its BIAs to the public. As part of the settlement terms, although BlockFi will cease allowing new investments until its securities become properly registered, BlockFi may continue to deploy digital assets for existing BIA investors and may continue to pay interest. Between February 14 and when BlockFi Inc.’s securities become registered and qualified or permitted for sale with the states and the SEC, current investors may keep their existing investments with BlockFi and will continue to earn interest under their initial agreements with the company. This measure is designed to protect the interests of existing investors while allowing BlockFi time to bring itself into compliance with state and federal law.
“We are pleased that the multi-state securities working group was able to successfully work together with the SEC and BlockFi to help bring BlockFi into compliance with critical investor protection regulations,” said Rachel Anderson Rynders, Texas State Securities Board Enforcement Division Attorney.
BlockFi’s BIAs are one example of a type of digital asset lending investment offered by firms. The SEC’s order provides a dual legal analysis of BIAs, applying the tests for both investment contracts and notes. State actions also note that the securities fit the test for evidence of indebtedness. When offering investments to the public, firms should consider all definitions of a security and conduct the necessary analyses to determine if their activities fit any of those definitions. Firms offering lending products need to comply with state and federal securities laws, which are designed to make sure investors receive adequate and truthful disclosures in order to make informed decisions about whether particular investments are appropriate.
Formed in 1919, NASAA is a nonprofit association of state, provincial and territorial securities regulators in the United States, Canada and Mexico. NASAA has 67 members, including the securities regulators in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands with a shared mission of protecting investors from fraud and abuse. For more information, visit: www.nasaa.org.
For More Information:
Jeanne Hamrick | Director of Communications
Karen Grajales | Communications & Investor Outreach Manager