Updated: State Regulators Pursue Nexo for Failure to Register Crypto Interest Account Program | Practical Law

Updated: State Regulators Pursue Nexo for Failure to Register Crypto Interest Account Program | Practical Law

Eight state regulators have acted against crypto company Nexo for its failure to register its Earn Interest Product (EIP) crypto interest account program and misrepresenting its registration status.

Updated: State Regulators Pursue Nexo for Failure to Register Crypto Interest Account Program

by Practical Law Finance
Published on 28 Sep 2022 • USA (National/Federal)
Eight state regulators have acted against crypto company Nexo for its failure to register its Earn Interest Product (EIP) crypto interest account program and misrepresenting its registration status.
On September 26, 2022, state regulators representing New York, California, Kentucky, Maryland, Oklahoma, South Carolina, Washington, and Vermont, working as part of a North American Securities Administrators Association (NASAA) working group, filed complaints or issued cease-and-desist orders against crypto companies Nexo Inc., Nexo Capital Inc., Nexo Financial LLC, and Nexo Group (collectively, Nexo) in connection with its Earn Interest Product (EIP) crypto interest account program. The complaint and orders allege that Nexo failed to register as a securities or commodities broker or dealer with these states, as applicable, and made misrepresentations to investors about its registration status.
The EIP program allows investors to deposit crypto assets into accounts with Nexo in exchange for earning interest on those deposits. The state regulators assert that Nexo advertised that EIP could provide investors with yields of up to 36% annually on their crypto deposits. While Nexo’s interest payments to EIP investors function like those for pooled investment vehicles, Nexo investors do not benefit from the protections of regulators such as the Securities Investor Protection Corporation and the Federal Deposit Insurance Corporation.
The state regulators took the following actions against Nexo:
  • New York. New York Attorney General Leticia James filed a complaint in New York County State Supreme Court against Nexo Inc. and Nexo Capital Inc. for repeated violation of state anti-fraud and investor protection laws (N.Y. Gen. Bus. Law §§ 352–353, and N.Y. Exec. Law § 63(12)). In addition to Nexo's failure to register with the state as a securities dealer for its sale of EIP, the complaint alleges that Nexo engaged in the purchase and sale of commodities through its virtual currency trading platform Nexo Exchange without being registered as a state securities dealer. The complaint seeks an injunction against Nexo from further violations of state law, restitution to the investors, and disgorgement of revenue from the unlawful conduct. In a related press release, the Attorney General indicated that approximately 10,000 New Yorkers have Nexo accounts.
  • California. The California Department of Financial Protection and Innovation (DFPI) issued a cease-and-desist order to Nexo Group, Nexo Inc., and Nexo Capital Inc. for violating California securities law (Cal. Corp. Code § 25110) by offering and selling EIP accounts within the state without registering as a state securities dealer. The order directs Nexo to refrain from offering and selling securities within the state unless the securities are qualified under section 25019 of the California Corporate Securities Law of 1968 (Cal. Corp. Code § 25019). The order indicates that over 18,000 California residents have EIP accounts with investments totaling at least $174.8 million.
  • Kentucky. The Kentucky Department of Financial Institutions issued an emergency cease-and-desist order to Nexo Group, Nexo Inc., and Nexo Capital Inc. for violating KRS 292.340 for selling securities within the state without registering as a state securities dealer and directs Nexo to refrain from selling securities in Kentucky unless registered. The order indicates that 542 EIP accounts have been opened by Kentucky investors with investments totaling $31 million.
  • Maryland. The Maryland state attorney general filed a cease-and-desist order against Nexo Inc., Nexo Capital Inc., and Nexo co-founder Antoni Trenchev in which it alleged that Nexo and Trenchev were operating as unregistered broker-dealers in offering and selling EIP accounts in violation of Maryland Securities Act, Corporations and Associations Article, §§11-301, 11-306, 11-401, 11-402, and 11-501. The order directs respondents to refrain from further violations of the Maryland Securities Act and indicates respondents should be permanently barred from engaging in the securities and investment advisory business in the state. A related press release indicated that 1,800 Maryland residents had EIP accounts with investments totally $15 million.
  • Oklahoma. The State of Oklahoma Department of Securities issued a cease-and-desist order to Nexo Financial LLC, Nexo Inc., and Nexo Capital Inc. for its failure to register the EIP program pursuant to the Oklahoma Uniform Securities Act of 2004, Okla. Stat. tit. 71, § 1-301, and directs Nexo to refrain from continuing to offer and sell EIP in the state. The order indicates that approximately 580 Oklahoma residents have EIP accounts with investments of approximately $40 million.
  • South Carolina. The Office of the South Carolina Attorney General Securities Division filed a cease-and-desist order against Nexo Inc. and Nexo Capital Inc. in which it alleged Nexo violated South Carolina Uniform Securities Act of 2005, S.C. Code Ann. § 35-1-501, by offering unregistered securities in the state. The order directs Nexo to refrain from transacting business within the state and pay a $625,000 civil penalty and costs associated with the investigation. A related press release indicates that 1,150 South Carolina residents had EIP accounts with investments of $7.3 million.
  • Washington. The Washington State Department of Financial Institutions (DFI) issued a statement of charges and intent to issue a cease-and-desist order against Nexo Inc., Nexo Capital Inc., and Nexo co-founder Antoni Trenchev for violating the registration section of the Securities Act of the state of Washington, RCW 21.20.140 and RCW 21.20.040, and the anti-fraud section of the Securities Act of the state of Washington, RCW 21.20.010, by making untrue statements regarding EIP. Based on its tentative findings of fact, the DFI is pursuing a cease-and-desist order that would direct respondents from continuing to violate the state securities act and impose a $1 million fine, as well as charges for costs associated with proceedings. The statement of charges indicated that there were 2,368 Washington EIP accounts with investments totaling $32,740,000.
  • Vermont. The Securities Division of the Vermont Department of Financial Regulation filed an ex parte cease-and-desist order against Nexo Financial LLC, Nexo Inc. and Nexo Capital Inc. for violating Vermont Uniform Securities Act, 9 V.S.A. § 5102(28) by failing to register EIP and ordered Nexo to refrain from the offer and sale of EIP unless properly registered.
Nexo indicated that since February 19, 2022, it no longer offers or sells EIP accounts to US residents and it has disallowed additional deposits into existing EIP accounts held by US investors.
Update: On January 19, 2023, Nexo Capital Inc, a Cayman Islands firm, agreed to pay $22.5 million in fines to settle the charges brought against various Nexo entities by the multistate coalition formed as part of the NASAA working group. Each of the 53 jurisdictional NASAA members will be eligible to claim a portion of the settlement. For the states participating in the settlement, Nexo will pay a fine of $424,528.30 and cease offering and selling the EIP or accepting further investments in the EIP until such activities are compliant with applicable state and federal securities laws.
Also on January 19, 2023, the SEC issued an order settling charges against Nexo Capital Inc. for failing to register the offer and sale of the EIP. Nexo agreed to pay an additional $22.5 million penalty to the SEC and to cease the offer and sale of EIP to US investors.
In addition to the settlements, another consequence of the charges brought by the US states and the SEC is they were in part the basis of the Cayman Islands Monetary Authority's (CIMA) rejection of Nexo Capital Inc.'s registration as a virtual asset service provider (VASP). CIMA indicated in its rejection that Nexo did not meet CIMA's risk profile as " Nexo posed a risk to market confidence, consumer protection and reputation of the Islands as a financial center." On January 12, 2023, Nexo filed suit against CIMA seeking reversal of the decision and a declaration that Nexo Capital Inc. is suitable to be registered under the island's Virtual Asset Act.