Friday’s announcement by the SEC was that the agency had taken its first enforcement action in relation to decentralized finance (defi). This case concerns’securities using Defi Technology.
Two Florida men, Derek Acree and Gregory Keough, were charged by the regulator for selling securities unregistered in excess of $30 million. They were also accused of misleading investors regarding the operation and profitability their business Defi money Market.
Two types of digital tokens were sold by them using smart contracts and defi tech: DMM governance tokens (DMG) and mtokens. While the former promised to pay 6.25 percent interest, the latter claimed to ‘give holders certain voting rights, a portion of excess profits and the ability to make a profit from DMG governance tokens resales in secondary markets.
The SEC explained that they offered and sold the tokens to claim that ‘Defi Money Market could earn interest and profits. It would use investor assets for the purchase of’real world assets’ that generate income like car loans.
They did not inform investors when they realized that the price volatility of digital assets used for purchasing tokens was creating risk that income from income-generating assets would not be sufficient to compensate investors’ principal appreciation. Instead they’misrepresented the company’s operations, including falsely claiming that Defi Money Market had purchased car loans, which they posted on Defi Money Market’s website.
The SEC found that defendants used personal funds as well as funds from other companies to pay principal and interest for mtoken redemptions.
Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, Daniel Michael commented that ‘the labelling of the offering as decentralized, and the securities as governance tokens, did not prevent us from ensuring that Defi Money Market is immediately shut down, and that investors are paid back. The SEC announced:
Respondents agreed to a cease and desist order without admitting or denigrating the findings of the SEC’s Order. This includes disgorgement totaling $12.849,354 as well as penalties of $125,000 for Keough, Acree.
The commission says that the defendants funded smart contracts so that token holders could redeem their tokens, and get all principal and interest due.