On Thursday, the United States Securities and Exchange Commission (SEC) and Coinbase came together for a pre-motion hearing. In the hearing, the SEC argued that just because it approves an S-1 filing from a company, does not mean the firm is not operating, or will not operate in “violation of the law.”
According to the released documents from the hearing, the SEC asserted that approving a firm’s S-1 application to go public, does not represent a “blessing” from the regulator, nor does it provide a verification that the business is regulatory compliant.
There is no way that an approval of an S-1 is a blessing of a company’s entire business. In fact, there is no evidence being put forth that the SEC looked at specific assets and made specific determinations and then gave Coinbase comfort that this would not later be found to be a security.
Form S-1 is the registration statement that the SEC requires domestic issuers to file in order to publicly offer new securities. That is, issuers file S-1s for initial public offerings (IPOs) and follow-on offerings of new securities.
Furthermore, the SEC stated that it was not signing off on Coinbase’s business structure when giving it the greenlight to go public back in April 2021. Peter Mancuso said, SEC trial counsel, added that:
Your Honor, I’ll say that simply because the SEC allows a company to go public does not mean that the SEC is blessing the underlying business or the underlying business structure or saying that the underlying business structure is not in violation of the law.
After Mancuso’s comments in the court, U.S. District Judge Katherine Polk Failia asked for a moment to sort of get rid of the skepticism she had after those comments and then she went on to raise some questions. She explained that
she is “not saying that the commission should be omniscient at the time it’s evaluating a registration statement and that it should know all things.” Further, she added:
But I would have thought the commission was doing diligence into what Coinbase was doing, and somehow I thought that it would say, you know, you really shouldn’t do this. This is violative of the securities laws, or we are kind of in some interesting unchartered territory here with respect to whether the assets on your platform are securities, so be forewarned that maybe someday there could be a problem.
To this, Mancuso instantly reiterated the SEC’s argument that the S-1 filings are more focused on approving company disclosures, rather than the agency itself signing off on a business structure via an approval.
Judge Failia then posited to Mancuso if the SEC could not have said to Coinbase to register as a securities exchange. She questioned “that was within the power of the SEC to do, was it not?” To this, Mancuso replied “I can’t really speak to that.”
On June 6th, the SEC filed charges Coinbase for violating federal securities laws and operating without a license. It alleged that Coinbase was operating as an unregistered broker, clearinghouse and exchange all in one go, having listed at least 13 different cryptocurrencies that are unregistered securities.
Following this, the exchange sent its opening statement in which it rejected the base of allegations it build its case on. It also claimed that “the SEC has chosen” to pursue enforcement actions.
In its response, the SEC said it would oppose any motion for judgement Coinbase would file and asked the court to reject Coinbase’s arguments that the suit violated the major questions doctrine and other concerns. It also alleged that Coinbase intentionally violated laws.
Following the pre-motion hearing, Twitter users including Cameron Winklevoss, Gemini co-founder, highlighted the implications of such statements. They questioned why the regulator would allow a supposedly non-compliant business to go public in the first place. The question came amid the agency’s promoted goal to protect U.S. consumers in the face of recent enforcement actions.
