SEC targets crypto venture capital firms in securities crackdown: report

BlockTower Capital's founder claims that the regulator is investigating VCs for securities violations.

a regulator examining a briefcase

Key Takeaways

  • The SEC is probing crypto VCs for acting as unregistered securities dealers.
  • These investigations are part of a broader SEC crackdown on the crypto industry.

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The Securities and Exchange Commission (SEC) has reportedly launched investigations into cryptocurrency venture capital firms for potentially acting as unregistered securities dealers, according to a report from DL News citing BlockTower Capital founder Ari Paul.

Paul stated on the Unchained podcast that the SEC has initiated “a bunch of investigations into VCs for acting as unregistered securities dealers.” He suggests that the discounted token deals some VCs make with crypto projects could violate securities laws.

This development marks a significant escalation in the SEC’s ongoing crackdown on the digital assets industry. Under Gary Gensler, the agency’s regulatory regime has already taken legal action against major crypto exchanges like Coinbase, Kraken, and Binance for allegedly offering unregistered securities to investors.

Paul outlined a hypothetical scenario to illustrate potential violations. He described deals where crypto projects promise to sell tokens to VCs at large discounts before launch, with the expectation that VCs will promote the tokens.

“That is hiring the VC as a marketer,” Paul explained. “That is acting as a securities dealer. And from an ethical perspective, you’re acting as a pump-and-dumper very explicitly,” he adds.

The SEC’s broadening focus now includes DeFi applications and other industry participants. In May, online brokerage Robinhood received notice of a potential lawsuit over its crypto business. The agency has also charged Consensys for alleged unregistered securities sales through its MetaMask staking service, which Consensys denies. Additionally, the SEC has asserted that decentralized exchange Uniswap is an unregistered securities exchange controlled by Uniswap Labs.

This expanded scrutiny of VCs represents a new front in the ongoing regulatory battle between the SEC and the crypto industry. While the agency maintains that cryptocurrencies fall under existing securities laws, the industry argues for new, tailored regulations to govern digital assets. As the slew of litigations continue, the SEC appears to be widening its enforcement net across the crypto ecosystem.

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