IN THIS ISSUE
SEC Settles First-Of-Its-Kind $13m DeFi Tech Action; NASDAQ Board Diversity Rules Challenged in Fifth Circuit; Delaware Court of Chancery Declines to Enforce Contractual Limitations on Liability to Bar Contractual Fraud Claims.
SEC SETTLES FIRST-OF-ITS-KIND $13M DEFI TECH ACTION
On August 6, 2021, in its first enforcement action against a “decentralized finance” platform, the U.S. Securities and Exchange Commission announced a $13 million settlement against the founders of DeFi Money Market (DMM) for allegedly selling more than $30 million in securities in unregistered offerings by using smart contracts and “DeFi” technology to sell digital tokens and for misleading investors concerning the operations and profitability of their business.
According to the SEC’s order, founders Gregory Keough and Derek Acree, and their company, Blockchain Credit Partners, offered and sold securities in unregistered offerings through DMM from February 2020 to February 2021. DMM sold two types of tokens: mTokens, which accrued 6.25% interest, and DMG tokens, so-called “governance tokens,” that ostensibly gave the holders certain voting rights, a share of excess profits, and the ability to profit from DMG token resales in the secondary market. DMM claimed they could pay investors 6.25% interest on digital assets because DMM would use investor assets to buy “real world” assets (such as car loans) that would create adequate income to pay the assured interest and produce profits.
However, after publicly unveiling DMM, Keough and Acree purportedly realized that DMM could not operate as promised because the 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. Rather than notifying investors of this roadblock, they allegedly misrepresented how the company was operating, including by falsely claiming that DMM had acquired profitable income generating assets in the form of car loans without having any such assets in its actual possession. Instead, Keough and Acree used their personal funds and funds from the other company they controlled to make principal and interest payments for mToken redemptions. In February 2021, DMM announced that it was shutting down and voluntarily ceased offering and selling mTokens by disabling the DMM website and redirecting website visitors to a page where they could redeem outstanding mTokens.
As the latest sign of the intensifying regulatory scrutiny for cryptocurrency markets, the SEC found that Keough, Acree, and DMM violated Sections 5(a) and 5(c) of the Securities Act of 1933 by conducting unregistered offers and sales of both types of digital assets. The SEC also found that Keough, Acree, and DMM violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5…
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