Crypto Analyzer

SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes

The Securities and Exchange Commission (SEC), has indicted Terraform Labs PTE Ltd, a Singapore-based company, and Do Hyeong Kwon as part of a multi-billion-dollar fraud involving crypto asset securities. This included an algorithmic stablecoin and others. These allegations cover a period of four years from April 2018 to May 2022. They allege that Terraform Labs PTE Ltd and Do Hyeong Kwon raised billions from investors through unregistered transactions, and then offered and sold an interconnected set of crypto asset securities.

Kwon and Terraform are accused of marketing these crypto assets securities to investors to earn profits. The complaint repeatedly claims that the tokens will increase in value. Terra USD (UST) was promoted as a stablecoin with a high yield, and advertised that it would pay as much as 20% interest through the Anchor Protocol. Kwon and Terraform, the SEC allege, also misled investors regarding the stability of UST. Kwon, while marketing the LUNA token, repeatedly misled investors that a popular Korean payment app used Terra blockchain for transactions that would accrue value.

UST became depegged from U.S. Dollar in May 2022. Its price and those of its sister tokens fell to almost zero, causing devastating losses to investors. Gary Gensler, SEC Chair, said that Terraform, Do Kwon and Do Kwon did not provide full, fair, or truthful disclosures to the public as required for a variety of crypto assets securities, most notably Terra USD and LUNA. They also claimed that they committed fraud by making false and misleading statements in order to gain trust and cause devastating losses for investors.

The U.S. District Court in the Southern District of New York filed the complaint against the defendants for violating the Registration and Anti-fraud provisions of both the Securities Act (and the Exchange Act). Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said, “Today’s action not only holds the defendants accountable for their roles in Terra’s collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets, but once again highlights that we look to the economic realities of an offering, not the labels put on it.”

This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws, but it also demonstrates the strength and commitment of the SEC’s dedicated public servants. Even when defendants tried to block them from accessing important information about the business, the SEC stood firm. The SEC’s mission is to protect investors and ensure fair markets. This case highlights the importance and fairness of offering crypto assets securities.

As crypto evolves, it is important that you remember that the same laws that are applicable to traditional securities also apply for crypto asset securities. Kwon and Terraform were the targets of an enforcement action by the SEC. This serves as a warning to other crypto-space professionals that any fraud or misleading activity will be investigated.