A former senior official with the US Securities and Exchange Commission (SEC) says Coinbase cannot use their approval for an initial public offering (IPO) as the only credible defense regarding their recent legal issues.
The SEC last week sued Coinbase, alleging the largest U.S. crypto exchange operated as an unregistered stock exchange, broker, and clearing house.
Coinbase CEO Brian Armstrong Fast responded to the lawsuit on Twitter, arguing that the SEC “reviewed our company and allowed us to go public in 2021” when the regulator approved the exchange’s S-1 IPO.
However, John Reed Stark, who founded the SEC’s Office of Internet Enforcement and served as its chief for 11 years, argues that Coinbase’s IPO approval does not imply that the SEC will approve anything the company might do in the future.
“The purpose of the SEC review is to ensure that investors and potential investors have all the facts before purchasing a security, not to confirm that a company is legit. The SEC staff reviews the registration statements to see if the SEC’s disclosure rules are met — and that’s it.
The SEC does not evaluate the merits of securities offerings or determine whether the securities being offered are “good” investments or appropriate for a particular type of investor. In addition, the approval of a registration statement is not an SEC endorsement of its products or services or a statement that a registrant will legally conduct business.
For example, Stark notes that the SEC does not approve of drugs sold by drug companies or the safety of vehicles sold by auto companies. The former SEC official also notes that Coinbase acknowledges in its own S-1 filing that it may be subject to regulatory oversight regarding securities classifications in the future.
Stark even goes so far as to accuse Armstrong’s argument of being “criminal.”
“In this sense, any prospectus or offering document provided to investors, the so-called ‘SEC No Approval Clause’ on its cover. The SEC No Approval Clause usually states something like this:
‘The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined whether the prospectus or this prospectus supplement is true or complete.
Any statement to the contrary is a criminal offence.’“
The former SEC official predicts that Coinbase will lose to the SEC in a lawsuit.
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