In the wake of the Securities and Exchange Commission (SEC)’s lawsuit against Coinbase, many are wondering why the crypto exchange was allowed to go public if it was offering unregistered securities.
Coinbase went public in April of 2021, with opening bids for shares climbing to over $400. But the enthusiasm was short-lived – the price halved within two months.
Issues regarding future revenue, trading fees, and competition seemed to nip at Coinbase’s heels, despite glowing documentaries and a broader market rally by the end of 2021. However, these were only the financial and fiscal problems the company was facing.
Regulatory scrutiny and the S-1
All companies planning to go public are required by law to file an S-1 with the SEC. This form discloses basic financial information, risks, and concerns for the company going forward.
One of the most important paragraphs in Coinbase’s S-1 can be found between pages 29 and 30, when it openly admits it could find itself in hot water with the SEC:
“We have policies and procedures to analyze whether each crypto asset that we seek to facilitate trading on our platform could be deemed to be a “security” under applicable laws,” Coinbase’s S-1 read. “Regardless of our conclusions, we could be subject to legal or regulatory action in the event the SEC, a foreign regulatory authority, or a court were to determine that a supported crypto asset currently offered, sold, or traded on our platform is a “security” under applicable laws.”
The firm continued, “Because our platform is not registered or licensed with the SEC or foreign authorities as a broker-dealer, national securities exchange, or ATS (or foreign equivalents), and we do not seek to register or rely on an exemption from such registration or license to facilitate the offer and sale of crypto assets on our platform, we only permit trading on our core platform of those crypto assets for which we determine there are reasonably strong arguments to conclude that the crypto asset is not a security.”
This section alone captures the problem with the suggestion that Coinbase shouldn’t have been allowed to go public: one of the main risk factors they acknowledge is that the assets tradeable on their platform could very well one day be considered unregistered securities.
Grewal and Armstrong lean into the confusion
Chief legal officer Paul Grewal and chief exec Brian Armstrong have both chosen to lean into the confusion surrounding Coinbase’s ability to go public. Grewal mentioned it in front of the House Committee on Agriculture meeting and Armstrong tweeted about it shortly after the lawsuit was announced, stating, “Remember the SEC reviewed our business and allowed us to become a public company in 2021.”
The reality is that even Coinbase was well aware of regulatory uncertainty regarding unregistered securities before they went public and knew the SEC could rule against them at any time.
This doesn’t excuse the fact that, perhaps, the SEC should have pushed harder against Coinbase when they first applied to become a publicly-traded company. One lawyer familiar with the matter told Protos, “It is weird to suggest that the same agency that allowed a company to go public now turns around and says ‘your entire core business is illegal as operated.’”
The lawyer continued, “How much is a [regulatory] agency constrained by the prior decisions of that same agency? You don’t want agencies making wild swings, but it’s also a good thing to have agencies reevaluate their previous decisions.”
So, while cryptocurrency advocates and executives may not like the fact that the SEC has decided to go after a company for offering unregistered securities to retail markets, especially after allowing said company to go public, there is – at least at face value – nothing illegal or unsavory about the decision.
Budgetary constraints and democracy
Another question: Why is the SEC is going after Coinbase and Binance as opposed to the numerous coins labeled as securities in both lawsuits?
The answer is likely more straightforward than can be presumed with government bureaucracies: the SEC has a budget that makes it difficult to bring thousands and thousands of court cases. Attacking the marketplaces where the assets are traded is simply a more effective way to ensure those assets struggle to trade any longer.
Also, seeing as how the SEC and Commodity Futures Trading Commission (CFTC) flaunt the penalties and fines they amass over a yearly period to increase the budgetary funding they receive from Congress, moments like when the LBRY token was fined $22 million and then had the fine cut to $111,000 may appear very embarrassing for regulators – who have spent limited government resources and funds to go after, seemingly, already broke cryptocurrency projects. It’s much safer to go after companies with war chests and a willingness to settle.
“It would be impossible to hold the SEC to the standard [of bringing action against every coin deemed an unregistered security],” a lawyer told Protos. “The SEC can argue Coinbase should have checked to see if those [tokens] were on file with registrations. It’s Coinbase’s burden to not trade in unregistered securities.”