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Why Nexo agrees to pay $45M penalty to SEC & State Authorities

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Nexo Capital Inc. has been charged by the United States Security and Exchange Commission (SEC) for unregistered offer and sale of its retail crypto asset lending product, Earn Interest Product (EIP) and filed with a $22.5 million penalty each by both the SEC and the State Regulatory Authorities.

Without admittance to the charges, Nexo has accepted to pay the penalties. The firm has also agreed to cease its unregistered offer and sale of the EIP to investors in the United States.

 “Nexo’s settlement agreement involves a cease-and-desist order prohibiting it from violating the registration provisions of the Securities Act of 1933.” 

The offer and sale of EIP by Nexo began in the United States in June 2020, allowing U.S. investors to deposit their crypto assets in the condition of an interest by Nexo. According to the U.S. order, Nexo promoted the EIP as an interest rewarding product and expressed it would use investors’ crypto assets to generate income in various ways. The income generated will be used by the firm to fund its business and pay interest to EIP investors. However, the order finds that “the EIP is a security, and the offer and sale of the EIP did not qualify for an exemption from SEC registration”. Nexo was, hence, required to register its offer and sale of the EIP, and it failed to comply. 

Speaking on the case, SEC Chair, Gary Gensler said, “SEC charged Nexo with failing to register its retail crypto lending product before offering it to the public, bypassing essential disclosure requirements designed to protect investors.”  “Compliance with our time-tested public policies isn’t a choice. Where crypto companies do not comply, we will continue to follow the facts and the law to hold them accountable. In this case, among other actions, Nexo is ceasing its unregistered lending product as to all U.S. investors’, the SEC chair added.

Director of the SEC’s Division of Enforcement, Gurbir S. Grewal also made a point to why Nexo was charged and said crypto assets are included in federal securities law. According to him, “we are not concerned with the labels put on offerings, but on their economic realities. And part of that reality is that crypto assets are not exempt from the federal securities laws.” “If you’re offering or selling products that constitute securities under well-established laws and legal precedent, then no matter what you call those products, you’re subject to those laws and we expect compliance.”

Prior to the charge, the firm had ceased offering EIP to new U.S investors. This was a voluntary action by Nexo following SEC’s charges on similar crypto investment products in 2022. Nexo as well halted paying interest on new funds added to existing EIP accounts of U.S. investors.

Afterward, Nexo announced halting the EIP in some states in December of 2022 and phased out all of its products and services in the United States. It permanently ceased to offer the EIP to all U.S. investors.

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