The Arkansas Securities Department recently issued a consent order against cryptocurrency platform Nexo Capital Inc. regarding unregistered offerings and sales of securities in the form of digital asset investments.
Nexo, a Cayman Islands company established in 2018, provides crypto-asset-related financial services, including investment, trading, borrowing and lending, to retail and institutional clients in the United States. A North American Securities Administrators Association task force of state securities regulators led a comprehensive investigation into Nexo’s Earn Interest Product program. During the investigation, it was discovered that EIP investors could passively earn interest on digital assets by lending those assets to Nexo.
At all times, Nexo maintained total discretion over the income-generating activities used to achieve returns for investors. Nexo offered and promoted the EIP and other products to investors in the US on its website and social media, suggesting in some cases that investors could achieve returns as high as 36%.
Nexo allegedly failed to comply with state registration requirements and, as a result, Arkansas investors were sold unregistered securities in violation of Arkansas law and were additionally deprived of important information and disclosures necessary to understand the potential risks of the EIP.
Between June 17, 2020 and December 6, 2022, Nexo offered and sold its EIP accounts to new and/or existing Arkansas investors. As of July 31, 2022, Nexo had 93,318 EIP investors in the United States with a combined asset value of over $800 million. There were approximately 292 Arkansas investor EIP accounts with a total asset value of approximately $3.09 million.
Nexo agreed to pay $22.5 million to settle the charges with the 53 US NASAA member jurisdictions and will pay a fine of $424,528.30 to ASD. Furthermore, Nexo will cease offering and selling the EIP or accepting further investments in the EIP until such activities comply with applicable state and federal securities laws.
Nexo’s agreement to settle with ASD comes after Nexo announced it would phase out its products and services in the US before April 1.
“All financial services companies, including new companies that offer services for cryptoassets, must comply with Arkansas’ investor protection laws,” said ASD Interim Commissioner Campbell McLaurin. “This collective action by state regulators demonstrates to other companies that offer similar digital products and services the importance of bringing their business activities into compliance with Arkansas securities laws.”
ASD has previously warned Arkansans of growing concern over the proliferation of decentralized and digital asset-based financial products and services aimed at private investors. Many of these products and services are like traditional financial services offered by banks and brokerages, but without some of the regulatory safeguards of registered firms and products.
This settlement is also part of a larger multi-state effort to investigate companies that offer crypto-interest accounts and hold them accountable when they break the law, such as ASD’s March 2022 action against BlockFi Lending LLC.
Investors are encouraged to contact the Arkansas Securities Department with questions about any investment opportunity or the persons offering it for sale before investing in the product. Contact 1-800-981-4429 to report suspected fraud, inappropriate securities business practices or to obtain consumer information.
