SEC Settles Charges Against DeFi Platform DMM for Unregistered Offerings of Digital Asset Securities | Practical Law

SEC Settles Charges Against DeFi Platform DMM for Unregistered Offerings of Digital Asset Securities | Practical Law

The SEC filed a complaint and settled charges against DeFi Money Market (DMM) and its founders for failing to register sales of more than $30 million of digital asset securities and for misleading investors in the SEC's first-ever case involving digital asset securities and decentralized finance (DeFi).

SEC Settles Charges Against DeFi Platform DMM for Unregistered Offerings of Digital Asset Securities

by Practical Law Finance
Published on 12 Aug 2021 • USA (National/Federal)
The SEC filed a complaint and settled charges against DeFi Money Market (DMM) and its founders for failing to register sales of more than $30 million of digital asset securities and for misleading investors in the SEC's first-ever case involving digital asset securities and decentralized finance (DeFi).
On August 6, 2021, the SEC entered a cease-and-desist order settling charges against Cayman Islands-based Blockchain Credit Partners d/b/a DeFi Money Market (DMM) and Gregory Keough (Keough) and Derek Acree (Acree), DMM's Florida-based co-founders (with DMM, collectively, respondents) for:
  • The unregistered sales of more than $30 million of securities using smart contracts and decentralized finance (DeFi) technology.
  • Misleading investors on the operations and profitability of the DMM business.
According to the SEC, this is its first-ever case involving digital asset securities and DeFi technology. The SEC found that respondents offered and sold securities in unregistered offerings through DMM, which ran on the Ethereum blockchain, between February 2020 and February 5, 2021 (relevant period). The SEC found that respondents used smart contracts to sell two types of digital tokens that could be purchased from DMM:
  • mTokens, which paid 6.25% interest.
  • DMG governance tokens that purportedly gave holders certain voting rights, a share of excess profits, and the ability to profit from DMG governance token resales in the secondary market.
The SEC also found that respondents offered and sold 25 million DMG tokens in an initial coin offering (ICO) operated through DMM's website in May and June 2020. Respondents ultimately sold approximately $17.7 million in mTokens and more than $13.9 million in DMG tokens to the public, including US investors, during the relevant period. Under the order, the SEC found that:
  • The mTokens were securities under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act because:
  • The DMG governance tokens were securities under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act because they were offered and sold as investment contracts (15 U.S.C. §§ 77b & 78c).
  • Respondents violated Sections 5(a) and 5(c) of the Securities Act of 1933 (Securities Act) (15 U.S.C. § 77e(a)) by conducting unregistered offers and sales of both types of digital assets.
Under existing precedent, a note is presumed to be a security unless it falls into certain judicially created categories of financial instruments that are not securities (See Practice Note, Exchange Act: Section 10(b) Jurisdictional Defenses: Identifying a Security: Promissory Notes). An investment contract is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. (see Practice Note, SEC Regulation of Digital Assets: The Howey Test and the SEC's April 2019 Framework for Digital Asset Regulation).
Under the order, the SEC also found that respondents violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act (15 U.S.C. § 78o(a)), as well as Rule 10b-5 under the Exchange Act because respondents made materially false statements and engaged in other deceptive acts concerning DMM’s business operations and profitability.
The SEC considered the prompt remedial acts undertaken by the respondents after DMM ceased operations on February 5, 2021, and their cooperation with the SEC staff. Without admitting or denying the findings in the SEC’s order:
  • Respondents Keough and Acree have undertaken to refrain for five years from the SEC order's date from participating in any offering of a digital asset security, other than purchasing or selling digital asset securities for their own personal accounts.
  • Respondents Keough and Acree consented to being prohibited for five years from the SEC order date from acting as an officer or director of any issuer that has a class of securities registered under Section 12 of the Exchange Act.
  • Respondent DMM has undertaken to refrain from participating, directly or indirectly, in any future offerings of a digital asset security.
  • All respondents consented to cease and desist from committing or causing any violations and any future violations of Section 5 and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
  • Respondents agreed to pay a total of disgorgement of $12,849,354 and prejudgment interest of $258,052 to the SEC in agreed installments.
For more detail on DeFi, see Practice Note, Decentralized Finance (DeFi): Overview.
For further information on regulation of digital assets, see Practice Notes:
See also Practical Law's Blockchain Toolkit.