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Gemini and Genesis Global Capital Denied in SEC Case
A federal court has rejected a joint motion from crypto exchange Gemini and Genesis Global Capital to dismiss the Securities and Exchange Commission’s (SEC) case related to their defunct Gemini Earn program. The court’s ruling was detailed in a filing on March 13.
In addition to denying the motion to dismiss, the court also denied the companies’ request to strike the regulator’s demands for permanent injunctive relief and disgorgement of profits.
Howey Test Application
One aspect of the court’s decision was its application of the Howey test to determine whether Gemini Earn constituted an investment contract. The court found that the SEC’s complaint sufficiently established common enterprise and horizontal commonality, which are key components of the Howey test involving pooling investor assets and sharing fortunes.
Despite arguments from the companies claiming that market rate-based payouts and customer flexibility in terminating agreements suggested a lack of commonality, the court disagreed. It ruled that these factors did not negate the SEC’s allegations under the test.
The court also noted that the labeling of loans as commercial instruments in the agreements did not alter their economic reality as securities, especially considering investors’ expectations of profits mentioned in the SEC’s case.
Reves Test Analysis
In addition to the Howey test, the court applied the Reves test to assess whether Genesis’ activities were subject to securities laws. The court determined that the companies’ arguments against this presumption were not in line with the regulatory framework in this area.
The court highlighted that both Genesis and investors were primarily motivated by investment objectives rather than commercial transactions, with the promise of high returns attracting participants. The widespread distribution of agreements among a diverse investor base further supported the SEC’s position.
Given these factors, the court concluded that the Gemini Earn program, as structured and promoted, met the criteria for securities under the Reves test.
Overall, the federal court’s decision to deny the dismissal motion and uphold the SEC’s case against Gemini and Genesis represents a significant development in the ongoing legal scrutiny of crypto-related financial products.
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