Stablegains cryptocurrency exchange, is facing a legal battle after allegedly promoting and selling unregistered securities.
The US Securities and Exchange Commission (SEC) claims that the exchange was involved in the sale of UST, which it believes is an investment contract or a derivative product of LUNA, both of which are securities.
Due to the fact that the exchange failed to register UST as a security, the SEC has decided to file a complaint against the firm.
What the lawsuit states
The SEC states that purchasers of UST, including through Stablegains, invested in a common enterprise. Terraform Labs (TFL) pooled the funds from UST purchasers and seigniorage, and then used the money to develop and expand the Terra ecosystem.
The fortunes of all UST investors are linked to each other and to the success of the Terra Organization’s efforts, which is a common enterprise.
The SEC further alleges that Stablegains’ users were never informed of its trading activities involving UST/LUNA securities or the staking of these securities on the Anchor Protocol Platform.
Furthermore, the exchange did not disclose the inherent risks associated with its purchases of UST, thereby misleading its investors.
The SEC has also accused Stablegains of operating as a broker-dealer without being registered under the Exchange Act. The exchange is said to have brought together the funds of multiple buyers and sellers, and transmitted and managed digital asset buy and sell orders for UST using funds deposited by its consumers.
Stablegains was allegedly motivated by its own financial interests, as it received a direct financial benefit from each purchase of UST it conducted using depositor funds.
The exchange further benefited from purchases of UST because such purchases supported a liquid trading market for UST, which in turn made the Stablegains platform more attractive to depositors.
The SEC has also taken issue with Stablegains’ terms of use, which included limitations on liability and one-sided arbitration provisions intended to deprive investors of their day in court.
The exchange’s withdrawal release scheme was allegedly designed to discourage retail investors with limited resources from filing claims.
The legal action against Stablegains comes after the UST/LUNA crash in which the exchange was forced to sell a substantial portion of its Bitcoin holdings at a substantial loss to save the plummeting UST.
Stablegains violated securities laws
The SEC argues that the crash demonstrated the interconnectedness of LFG and TFL with each other and with LUNA and UST. The SEC also claims that UST was always an investment contract and a security, and that Stablegains violated Sections 5(a), 5(c), and 12(a)(1) of the Securities Act.
The SEC’s complaint seeks damages and interest from Stablegains, and the SEC has offered to tender to the exchange the UST or a substantial equivalent realized upon the sale of all UST upon the liquidation of their position in Stablegains.
In exchange for such tender, plaintiffs are entitled to recover the amount of consideration they paid to purchase the tendered UST. Stablegains has not yet responded to the SEC’s complaint.
