The U.S. Securities and Exchange Commission (SEC) has brought its first case against a company operating in the decentralized finance (DeFi) sector. The watchdog accused DeFi Money Markets of selling unregistered securities and making false representations to investors in its $30 million token sale.
As per a press release, the securities regulator charged two Florida men and their Cayman Islands-registered company for using smart contracts and DeFi technology to violate securities laws. Derek Acree and Gregory Keough are the founders of Blockchain Credit Partners, the parent company of DeFi Money Markets.
The SEC alleges that the two sold two types of tokens from February 2020 to February 2021. The first was mTokens, which could be purchased using other digital assets and paid 6.25% interest. They also sold DMG’s governance tokens that allegedly gave their holders voting rights and a share of the company’s profits.
While luring investors, the two claimed that they would pay out interest to the token holders by buying ‘real world’ assets that can generate income, such as car loans. However, shortly after setting up shop, the two realized that the price volatility of the digital assets that they received as payment for their tokens threatened their profit margins.
The SEC further alleged, “The order finds that rather than notifying investors of this roadblock, the respondents misrepresented how the company was operating, including by falsely claiming that DeFi Money Market had bought car loans that they displayed on DeFi Money Market’s website.”
The SEC claims that the two tokens were sold as investment contracts, violating the Securities Act of 1933 for unregistered offers and sale of digital assets. They also purportedly violated the anti-fraud provisions of the Securities Act.
The two men consented to a cease-and-desist order that included disgorging $12,849,354. They also consented to pay a $125,000 penalty each. In addition, they funded the smart contracts so that mToken holders could redeem their tokens and receive all principal and interest owed.
On its website, the company announced that it has ceased operations “as a result of regulatory inquiries.”
Gurbir Grewal, the director of the SEC’s Enforcement Division remarked, “Full and honest disclosure remains the cornerstone of our securities laws – no matter what technologies are used to offer and sell those securities. This allows investors to make informed decisions and prevents issuers from misleading the public about business operations.”
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