February 7, 2024

Introduction

The Securities and Exchange Commission (SEC) initiated cease-and-desist proceedings against TradeStation Crypto, Inc., a Florida-based subsidiary of TradeStation Group, Inc., which is in turn a subsidiary of Monex Group, Inc. The proceedings were based on the offering of crypto asset accounts with an interest feature that the SEC deemed as securities sold without proper registration.

Summary of Findings

TradeStation has been offering crypto asset accounts to investors since November 2019. Around August 2020, they introduced an interest feature allowing investors to earn variable interest rates by lending their crypto assets to TradeStation. This feature, which had attracted approximately 11,122 active users and $281 million in assets by December 2021, was offered and sold as securities in the form of investment contracts without proper registration with the SEC.

Detailed Facts

TradeStation’s operations included the promise to pay investors interest from revenues generated by lending their crypto assets to institutional borrowers. The company controlled and pooled these assets, engaging in revenue-generating activities at its sole discretion. This setup led investors to reasonably expect profits derived from TradeStation’s efforts. By June 2022, TradeStation voluntarily ceased offering the interest feature, highlighting the regulatory scrutiny and its impact on crypto asset services.

Legal Analysis

The SEC’s analysis concluded that TradeStation’s interest feature constituted the offer and sale of investment contracts, thus qualifying as securities under the Securities Act. Since these were offered without a registration statement filed or in effect with the SEC and without qualifying for an exemption from registration, TradeStation violated Sections 5(a) and 5(c) of the Securities Act.

This case highlights the critical intersection between innovation in financial technology and the need for adherence to established securities laws to ensure investor protection and market integrity.

At the heart of the SEC’s legal analysis is the application of the “investment contract” definition under the Securities Act. An investment contract, according to the Supreme Court’s landmark decision in SEC v. W.J. Howey Co., involves an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. TradeStation Crypto’s interest feature, which promised returns to investors based on the company’s use of pooled crypto assets for lending and other revenue-generating activities, squarely fits within this definition. Investors’ expectation of profits, primarily derived from TradeStation Crypto’s managerial efforts in deploying the assets, underscores the investment contract nature of the interest feature.

The SEC’s enforcement action further emphasizes the importance of registration or a viable exemption for offerings that qualify as securities under federal law. Registration serves crucial purposes, including providing potential investors with material information about an investment’s risks and opportunities, thereby facilitating informed decision-making. TradeStation Crypto’s failure to register the interest feature offering deprived investors of these protections, leading to the SEC’s finding of violations of Sections 5(a) and 5(c) of the Securities Act.

Cooperation and Remedial Efforts

TradeStation’s decision to cease the interest feature offerings and remove related references from its website was acknowledged as part of its cooperation and remedial efforts. The SEC considered these actions when accepting the Offer of Settlement.

Conclusion and Sanctions

The SEC ordered TradeStation to cease and desist from committing any future violations of Sections 5(a) and 5(c) of the Securities Act. Furthermore, TradeStation was ordered to pay a civil money penalty of $1,500,000.00 to the SEC for transfer to the general fund of the United States Treasury.

Summary and Implications

This proceeding underscores the SEC’s vigilance in regulating the evolving crypto asset market and its commitment to protecting investors by ensuring compliance with securities laws. For companies operating in the crypto space, this case serves as a cautionary tale about the importance of understanding and adhering to securities regulations, especially when offering products that might be deemed as investment contracts. It highlights the critical need for crypto businesses to engage in thorough legal analysis and seek proper registration or exemptions when offering similar features or products.

This proceeding was titled:
In the Matter of TradeStation Crypto, Inc., Administrative Proceeding File No. 3-21845.

The U.S. Securities and Exchange Commission’s Press Release can be found here:
Press Release 2024-16.

The U.S. Securities and Exchange Commission’s Order can be found here:
Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8a of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order.

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