Coinbase (NASDAQ: COIN) is the subject of a proposed class action suit for misleading investors as to both its financial situation and its technical capacity.
Late last week, Law360 reported that investor Donald Ramsey had filed a complaint against Coinbase in a California federal court. Ramsey claims that he and other investors suffered “significant losses and damages” following Coinbase’s mid-April debut on the Nasdaq exchange.
Coinbase began trading at $381 per share on April 14 before closing the day at $328. The shares nosedived to around $225 in mid-May after the company revealed that it was looking to raise $1.25 billion via a bond sale. The need for those extra funds became evident a few days later when the exchange suffered an outage after trading volume spiked during a steep plunge in the value of BTC, ETH and other digital currencies.
Coinbase’s Nasdaq debut was a direct listing, not an initial public offering, so while the exchange’s largest shareholders personally stood to make a pile, the company wouldn’t see a dime. Ramsey’s complaint argues that Coinbase gave investors a pre-listing illusion of fiscal strength even as it secretly knew that a “sizeable cash injection” would be required if the exchange was to handle the expected surge in new customers.
Coinbase’s share price remains mired around $225 and Ramsey believes the company’s top executives—including CEO Brian Armstrong and chief legal eagle Paul Grewal—made “materially misleading statements” in their prospectus while promoting upsides that “lacked a reasonable basis.”
It’s worth remembering that other material risks Coinbase acknowledged in its prospectus included “the identification of Satoshi Nakamoto … or the transfer of Satoshi’s Bitcoins.” Coinbase is a member of COPA, the cabal of small-block hardliners that is desperately trying to disprove Dr. Craig Wright’s claims to being Satoshi, the author of the Bitcoin white paper.
Long before Coinbase released its prospectus, the brother of Wright’s late associate Dave Kleiman began a costly effort to convince a Florida judge that Wright is Satoshi in order to make a claim on Satoshi’s stash of 1.1 million BTC. Coupled with the widespread publicity surrounding Wright’s claim to the Nakamoto heritage—including Wright’s recent court victory over Bitcoin.org administrator Cøbra—Coinbase can hardly plead ignorance if investors point out that ‘the identification of Satoshi’ is no longer a theoretical matter.
Coinbase also betrayed its investors by peevishly declining to list the BSV protocol that Wright supports, demonstrating a commitment to intransigence that only small blockers with proprietary interests in the status quo could maintain with a straight face.
Aggrieved investor Ramsay’s effort to prove that Coinbase violated the U.S. Securities Act could be pre-empted by the Securities and Exchange Commission (SEC), if recent actions against other digital currency platforms are any indication of the regulator’s current focus.
In late-June, Coinbase announced a new ‘high-yield alternative to traditional saving accounts’ that offers 4% annual percentage yield on USD Coin (USDC) stablecoin deposits. While Coinbase promotes the product as a way to ‘safely and securely’ earn interest far in excess of traditional bank accounts, the fine print makes it plain that this “is not a USD savings account and Coinbase is not a bank.”
Similar high-yield products offered by companies such as BlockFi found themselves under attack by both federal and state financial watchdogs last week. The regulators view these products as unregistered securities and believe consumers need to understand that the capital they stake in these products isn’t protected by federal deposit insurance. So Coinbase’s new product could prove even more ephemeral than Elon Musk’s BTC dalliance.
Last week saw the SEC’s new chairman issue a warning that the stablecoin sector was in for a regulatory wake-up call. Both USDC and Tether underwent exponential growth over the past year that helped drive up the price of the BTC token, which in turn drove hordes of crypto newbies to open accounts on exchanges such as Coinbase, which drove up Coinbase’s revenue numbers just in time for its Nasdaq debut.
USDC is effectively an in-house Coinbase product, and combined with Coinbase’s embrace of the even sketchier Tether stablecoin, the SEC will soon be summoning Coinbase execs to have them explain the finer points of creating value from thin air. After all, that’s supposed to be the Federal Reserve’s job.
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