On February 7, 2024, the U.S. Securities and Exchange Commission (“SEC”) announced charges and a related cease-and-desist order (the “Order”) against TradeStation Crypto, Inc. (“TradeStation”) for failing to register the offer and sale of its crypto-lending product.  In order to settle these charges, TradeStation agreed to pay a $1.5 million penalty.  As part of the agreement, TradeStation did not admit or deny the findings. 

TradeStation’s parent company has operated in the traditional finance world since 1982, though established its cryptocurrency services in November 2019 through this Florida-based subsidiary.  In August 2020, TradeStation began offering cryptocurrency deposit accounts where users could deposit digital assets into interest-bearing accounts in order to receive yield on their holdings.  As of December 2021, TradeStation boasted 11,122 active users and approximately $218 million in assets.  Of this, 8,472 users and approximately $195 million were of U.S origin.

To generate the yield for its customers, TradeStation pooled all deposited assets into omnibus wallets controlled and managed by the company.  The company then loaned these deposited assets to institutional investors and paid its customers’ yield with the revenue generated.  Prior to making any loans, TradeStation screened and selected prospective institutions prior to committing customer funds.  Consumers received variable yield rates at TradeStation’s discretion, typically changed based on market conditions and related to the specific assets each customer deposited.  TradeStation maintained control over these assets at all times. 

TradeStation’s marketing materials and user agreements clearly outlined these mechanics.  The company made general solicitations to the general public, including U.S investors, through various online mediums, including its website, press releases, social media, and elsewhere.  These marketing efforts noted that investors could “[p]ut your crypto assets to work for you.”  TradeStation’s website included a note regarding potential yield, stating customers could “[e]arn a sky-high 8%* per annum in USDC.”  At no point did TradeStation file a registration with the SEC. 

In its Order, the SEC noted that TradeStation’s yield offering constituted an investment contract pursuant to Section 2(a)(1) of the Securities Act.  The SEC reasoned that users tendered money to TradeStation in the form of crypto assets, who then pooled these assets collectively in order to generate revenue that it would return in part to its users.  As such, a user’s yield was linked to the actions of TradeStation, and TradeStation’s marketing materials clearly created this expectation amongst the general public. 

TradeStation ultimately voluntarily ended this yield-generating product for its customers on June 30, 2022.  TradeStation also paid an addition $1.5 million to settle a parallel investigation by the North American Securities Administrators Association (“NASAA”), a collection of state securities regulators.