SEC Settles First-of-its-Kind Case Charging Decentralized Finance Company with Fraudulent Offerings

The Securities and Exchange Commission (SEC) reached a settlement with two Florida men and their Cayman Islands company for allegations that they sold more than $30 million in unregistered securities using smart contracts and so-called “decentralized finance” (DeFi) technology, according to last Friday’s order

In addition, the accompanying press release explained, the respondents misled investors about the operations and viability of their business DeFi Money Market. 

The SEC stated that Gregory Keough, Derek Acree, and their company used smart contracts to exchange digital assets for “mTokens” which pay 6.25% interest, and DMG “governance tokens” that reportedly gave holders further rights including a share of excess profits. The respondents allegedly touted the two tokens’ viability to investors, explaining that they could pay interest and profits because the company would use investor funds to purchase “real world” assets that generated income, like auto loans.

According to the order however, the respondents soon realized that they could not fulfil these promises because “the price volatility of the digital assets used to purchase the tokens created risk that the income generated through income-generating assets would be insufficient to cover appreciation of investors’ principal.” Rather than informing investors of this complication, however, the men reportedly misrepresented how the company was operating and that it indeed made auto loan investments.

The order determined that the respondents conducted unregistered offers and sales of both tokens and that they violated the antifraud provisions of the Securities Act and the Securities Exchange Act of 1934. Keough and Acree reportedly settled the charges without admitting or denying the SEC’s allegations. The cease-and-desist order includes disgorgement totaling approximately $12.85 million and penalties of $125,000 apiece.