by T. GormanPosted on Posted in SECActions

The Commission filed 2 new cases last week. Each action was based on making false statements while soliciting investors and appeared to involve crypto assets. These cases raise questions regarding the Commission’s authority in the area of crypto assets.

The cases published last week by the Commission appear to represent a selective approach to the assertion of jurisdiction by the agency as to crypto assets. If in fact the agency is selectively asserting jurisdiction over crypto assets on a selective basis as it appears, the new approach presents significant questions regarding the fairness of applying undisclosed standards on selective basis without notice. If the agency intends to continue this approach it should, at a minimum, disclose that fact as well as the standards being applied.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the Commission filed 2 new civil injunctive actions and no new administrative proceedings.

Disclosure of prior violations: SEC v. Melton, Civil Action No. 1:23-cv-00434 (M.D. N.C.). This case named as defendants Marshall E. Melton and his company, Integrated Consulting & Management LLC. Defendants raised funds from six investors, average age of 75, when raising funds for what was supposed to be a plan to develop properties in downtown Laurinburg, North Carolina. The court granted summary judgment in favor of the Commission on one count of its compaint. In reaching this conclusion the court found that Defendants had violations Securities Act Sections 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Specifically, the court held that Defendants had an affirmative duty to disclose a prior disciplinary history. The duty arose from the long-standing history Mr. Melton has with some solicited in the past and specific statements made to some potential investors regarding their expertise which, according to the court, created a duty to disclose the past history. Remedies will be addressed at a later date. See Lit. Rel. 26292 (April 24, 2025).

Jurisdiction: SEC v. Nova Labs, Inc., Civil Action No. 1:25-00539 (S.D.N.Y.). Nova Labs is a case filed last week that centers on the sale of investment contracts “involving electronic devices and a rewards program that generates returns in the form of three Nova Labs crypto assets . . .” False statements were claimed to have been made in connection with the sales. Since early 2019 Defendant Nova Labs has raised about a one half a million dollars through the sale of “electronic devices that ‘mine’ one of three Nova Lab crypto assets, according to the Commission’s complaint. Those sales are alleged by the Commission to violate the federal securities laws. As the complaint states: “Nova Labs offered and sold Hotspots (the name of the assets) . . . as investment contracts and, thus, securities.” Marketing for the assets appeared to center on claims regarding three large entities Defendant claims were using the assets. Those claims were false, according to the complaint. The Commission settled one count of the complaint recently involving the sale of the mined assets. As part of the settlement Defendant consented to the entry of a final judgment based on Sections 17(a)(2) of the Securities Act. In addition, the company agreed to pay a penalty of $200,000. Other counts of the complaint were dismissed. If the SEC is not claiming to have jurisdiction over crypto, or abdicating the area, its participation in this case is at best questionable. If the agency is only asserting “selective” jurisdiction, the question is on what basis and by what authority is it asserting jurisdiction in that manner? It is time that the SEC clarifies its position and stops disregarding its due process obligations.

Offering fraud: SEC v. Feingold, Civil Action No. 1:25-cv-20436 (S.D. Fla. Filed Jan. 29, 2025). In this action the Commission filed a complaint which named as defendants: Steven S. Baldassarra; Davod J. Feingold; Joseph B. Baldassarra; Broad Street Global Management LLC; and Broad Street Inc. The the court granted the Commission’s request for a monitor which was agreed on by the parties. Under order the monitor’s obligation is to evaluate the conduct of Broad Street Global Fund, LLC, Broad Street Inc., and other related entities. The order also stipulates that “Defendants will not solicit any potential or actual investors, or accept any additional investments on behalf of the Fund, until further court order.” The order cited above is based on the complaint filed in the action. There the Commission claims that defendants have raised about $1 billion from over one thousand investors. Defendants are alleged to have made a series of offers that include investments in merchant cash advances, real estate infrastructure development, custom home building, hotel projects, and qualified business stock. The complaint claims that virtually all cash was diverted to accounts and assets owned by Broad Street Global Management, the Baldassarras or Broad Street. Investors were told that the investments would generate a series of tax-free returns. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and 17(a), Exchange Act Section 10(b) and Rule 10b-5 and Advisers Act Sections 206(1) and 206(2). See Lit. Rel. No. 26289 (April 21, 2025).

Jurisdiction – crypto: SEC v. CLS Global FZC LLC, Civil Action No. 1:24-cv-124 (D. Mass.), is a previously filed action. On April 7, 2025, the agency approved a settlement in this action which imposed permanent injunctions against Defendant, based on Securities Act Section 17(a)(1) and (3) and Exchange Act Section 10(b) and Rule 10b-5. In addition, Defendant, an alleged crypto exchange, was directed to pay a penalty of $425,000, disgorgement of $3,000 and prejudgment interest of $80.39. Finally, Defendant was directed to comply with certain undertakings which included an obligation to “take reasonable step as necessary to ensure that CLS Global’s clients are not U.S. persons or entities,” according to the SEC’s press release. The SEC’s complaint alleged that Defendant engaged in a scheme to induce investors to purchase crypto assets “by creating the false appearance of an active trading market.” While the agency can limit its exercise of jurisdiction to the proper limits, it seems questionable at best that it can at the same time impose remedies like those used here if it is not exercising jurisdiction. See Lit. Rel. No. 26287 (April 17, 2025).

ESMA

Risk: The European Securities and Market Authority published an assessment of the risked posed by the use of leverage in the fund sector, in a release dated April 24, 2025 (here).

Hong Kong

Remarks: Ms. Julia Leung delivered the Keynote remarks at OSC Dialogue on April 25, 2025 (here).

Singapore

Forms: The Monetary Authority published modifications for securities and futures licensing and the conduct of business regulations in a release dated April 18, 2025 (here).


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by T. GormanPosted on Posted in SECActions

Questions regarding the limits of the SEC’s jurisdiction in the crypto asset area have blossomed again since its decision to in the Kraken case early this year. There, the agency at least suggest that it was revising its approach to crypto assets if not outright exiting the area. Earlier this week the agency stepped into the crypto area again in its decision in ClS Global. But now the agency has settled one count of an action in which investment contracts were being sold while dismissing with prejudice others claims that appeared to involve crypto assets. SEC v. Nova Labs, Inc., Civil Action No. 1:25-00539 (S.D.N.Y.).

Nova Labs is a case filed this week that centers on the sale of investment contracts “involving electronic devices and a rewards program that generates returns in the form of three Nova Labs crypto assets . . .” False statements were claimed to have been made in connection with the sales.

Since early 2019 Defendant Nova Labs has raised about a one half a million dollars through the sale of “electronic devices that ‘mine’ one of three Nova Lab crypto assets, according to the Commission’s complaint. Those sales are alleged by the Commission to violate the federal securities laws. As the complaint states: “Nova Labs offered and sold Hotspots (the name of the assets) . . . as investment contracts and, thus, securities.” Marketing for the assets appeared to center on claims regarding three large entities Defendant claims were using the assets. Those claims were false, according to the complaint.

The Commission settled one count of the count of the complaint recently involving the sale of the mined assets. As part of the settlement Defendant consented to the entry of a final judgment based on Sections 17(a)(2) of the Securities Act. In addition, the company agreed to pay a penalty of $200,000. Other counts of the complaint were dismissed.

If the SEC is not claiming to have jurisdiction over crypto, or abdicating the area, its participation in this case is at best questionable. If the agency is only asserting “selective” jurisdiction, the question is on what basis and by what authority is it asserting jurisdiction in that manner? It is time that the SEC clarifies its position.

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