Former SEC Official Says Coinbase Is Committing ‘Criminal Offense’ in Its Defense Against SEC

A former high-ranking official at the U.S. Securities and Exchange Commission (SEC) says Coinbase can’t use their initial public offering (IPO) approval as any credible defense in regard to their recent legal issues.

The SEC sued Coinbase last week, alleging the top US crypto exchange operated as an unregistered securities exchange, broker and clearing agency.

Coinbase CEO Brian Armstrong quickly responded to the lawsuit on Twitter, arguing that the SEC “reviewed our business and allowed us to become a public company in 2021” when the regulator approved the exchange’s S-1 initial public offering.

However, John Reed Stark, who founded the SEC’s Office of Internet Enforcement and spent 11 years as its chief, argues that Coinbase’s IPO approval doesn’t imply that the SEC approves of everything that the company may do in the future.

“The goal of SEC review is to ensure that investors and potential investors have all the facts before buying a security, not to confirm that any business is legitimate. The SEC staff reviews registration statements to see if the SEC’s disclosure rules are satisfied – and that’s it.

The SEC does not evaluate the merits of securities offerings, or determine whether the securities offered are ‘good’ investments or appropriate for a particular type of investor. Furthermore, the approval of a registration statement is not an SEC endorsement of its products or services or a statement that a registrant will lawfully operate its business.”

Stark notes, for example, that the SEC doesn’t approve the drugs sold by drug companies or the safety of vehicles sold by automotive businesses. The former SEC official also notes that Coinbase acknowledges in its own S-1 document that it could be subject to regulatory scrutiny in the future regarding securities classifications.

Stark even goes so far as to accuse Armstrong’s argument of being “criminal.”

“Along these lines, every prospectus or offering document provided to investors has to have what is known as the ‘SEC No Approval Clause’ on its cover. The SEC No Approval Clause typically states something like this:

‘The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if the prospectus or this prospectus supplement is truthful or complete.

Any representation to the contrary is a criminal offense.’“

The former SEC official predicts that Coinbase will lose to the SEC in litigation.

Generated Image: Midjourney