- BlockTower's Ari Paul proffered a provocative commentary on the Unchained podcast.
- SEC action against VCs would mean the agency was broadening its crackdown on crypto.
The US Securities and Exchange Commission is targeting crypto venture capital firms in a slew of new investigations, according to one institutional investor.
Speaking on the Unchained podcast on Wednesday, Ari Paul, the chief investment officer of BlockTower Capital, said the SEC has launched a “bunch of investigations into VCs for acting as unregistered securities dealers.”
The discounted token deals that some VCs ink with crypto projects puts them in violation of the regulator’s strict securities laws, Paul said.
Latest escalation
The development would mark the latest escalation in the SEC’s crackdown on the digital assets industry.
Under its hard charging chair, Gary Gensler, the agency has slapped Coinbase, Kraken, and Binance with lawsuits alleging they are unlawfully offering unregistered securities to investors.
The agency has also taken aim at various DeFi apps it claims are running afoul of longstanding US securities laws.
“The SEC does not comment on the existence or nonexistence of a possible investigation,” an SEC spokesperson told DL News.
On the podcast, Paul proffered a hypothetical situation to illustrate how some VCs may be violating securities laws.
Before a crypto project launches a token, its team often makes deals with market makers or venture firms.
In these deals, the crypto project promises to sell the VC tokens at a large discount to where they expect them to trade in the future. In exchange, the VC is expected to promote the token.
“That is hiring the VC as a marketer,” said Paul, a former derivatives trader and portfolio manager at the University of Chicago.
“That is acting as a securities dealer. And from an ethical perspective, you’re acting as a pump-and-dumper very explicitly.”
SEC battle
For the last three years, the SEC has argued that cryptocurrencies fall under the authority of the Great Depression-era laws that govern stocks and bonds.
The crypto industry has pushed back, contending that digital assets are so novel they should be regulated by new statutes and rules.
Even as final judgment on the debate is still pending ongoing litigation, the agency is broadening its clampdown on the industry.
In May, Robinhood, an online discount brokerage, received a notice from the SEC indicating it faced a potential lawsuit for violating securities laws in its crypto business.
Those building DeFi apps haven’t escaped SEC action, either.
On June 28, the SEC charged Consensys for the unregistered sales of securities through its MetaMask staking service. Consensys denies the allegations.
Also in May, the SEC asserted that DeFi exchange Uniswap is an unregistered securities exchange controlled by Uniswap Labs.
Editor’s note: This article was updated to include comment from the SEC.
Tim Craig is a DeFi Correspondent at DL News. Got a tip? Email him at tim@dlnews.com.
