The U.S. Securities and Exchange Commission (SEC) is targeting cryptocurrency venture capital (VC) firms in a new series of investigations, according to an institutional investor.
Speaking on the Unchained podcast on Wednesday, Ari Paul – chief investment officer of BlockTower Capital said The SEC is conducting “a series of investigations into venture capital firms operating as unregistered securities dealers.”
Ari Paul – Chief Investment Officer of BlockTower Capital
The discounted token deals some VCs enter into with crypto projects put them in violation of the regulator’s strict securities laws, Paul said.
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The move marks the latest development in the SEC’s crackdown on the digital asset industry.
Led by Gary Gensler, the agency sued Coinbase, Kraken, and Binance, alleging they illegally offered unregistered securities to investors.
The agency has also targeted multiple DeFi applications that it claims are violating long-standing US securities laws.
An SEC spokesperson said:
“The SEC does not comment on the existence or non-existence of a potential investigation.”
On the podcast, Paul presents a hypothetical scenario to illustrate how some venture capital firms might violate securities laws.
Before a cryptocurrency project launches its token, its team often makes deals with a market maker or venture firm.
In these deals, the project promises to sell VC tokens at a discount so large that they expect to trade in the future. In return, the VC is expected to promote the token.
Paul, a former derivatives trader and portfolio manager at the University of Chicago, said:
“That’s hiring a VC to do marketing. It’s acting like a securities dealer. And from an ethical perspective, you’re acting like a very clear pump and dump.”
TSEC litigation
For the past three years, the SEC has argued that cryptocurrencies fall under the jurisdiction of laws governing stocks and bonds dating back to the Great Depression.
The crypto industry has been adamant in its opposition, arguing that digital assets are so novel that they should be governed by new laws and rules.
Even as a final ruling on the debate awaits litigation, the agency continues to expand its oversight of the industry.
In May, online discount brokerage Robinhood received a notice from the SEC saying it could be sued for violating securities laws in its cryptocurrency business.
Building DeFi applications is not exempt from SEC action either.
On June 28, the SEC accusation Consensys for selling unregistered securities through its MetaMask staking service. Consensys denies the allegations.
Also in May, the SEC asserted that DeFi exchange Uniswap was an unregistered securities exchange controlled by Uniswap Labs.
Minh Anh
According to DLNews
