Olympia – The Washington State Department of Financial Institutions (DFI) joined members of the North American Securities Administrators Association (NASAA) and the Securities and Exchange Commission (SEC) Thursday, Jan. 19, 2023 entering into a settlement totaling $45 million with Nexo Capital, Inc. (Nexo). In the settlement, Nexo agreed to pay a total of up to $22.5 million to state securities regulators, about $424,500 of which will be paid to WA DFI.
Over the past year, Washington DFI led a working group of state securities regulators investigating Nexo’s possible offer and sale of securities in the form of its Earn Interest Product (EIP). As a result of the investigation, WA DFI and nine securities regulators entered charging documents against Nexo that, among other things, alleged violations of state securities registration laws.
Nexo's EIP accounts allow customers to deposit crypto assets with Nexo; in exchange, customers passively earn interest on those deposits. Nexo has offered investors interest rates of up to 36% on their deposited crypto assets, significantly higher than rates offered for short-term, investment grade, fixed-income securities or bank savings accounts.
In offering its EIP, DFI found, Nexo failed to disclose material information about the investment, including, but not limited to, Nexo's EIP interest generation deployment activities, Nexo's legal and regulatory compliance in Washington, and the limitations of Nexo's financial representations.
Over the past few months, a working group made up of Washington, California, Oklahoma, Wisconsin, Indiana, Kentucky, South Carolina, Maryland, New York, and Vermont has engaged in negotiations to settle the charges filed against Nexo and come to a multi-state settlement with Nexo. The negotiations were led by James Kane and Holly Mack-Kretzler of WA DFI. The 10 working group states and three additional securities regulators have agreed to the terms of the settlement. Many more states are expected to follow.
“This settlement is a testament to the importance of participating in multi-state, multi-agency groups investigating national – and global – companies selling investments to the people who call Washington home,” DFI Director of Securities Bill Beatty said. “It’s more important than ever for people to verify a person or company is licensed to do business – and licensed to sell the particular product – before handing over any money.”
In addition to the monetary settlement, Nexo agreed that it will cease and desist from offering its EIP unless properly registered or exempt. It also agreed to notify EIP account holders on or before Feb.1, 2023 that investors should withdraw any assets from their accounts before April 1, 2023. Nexo also agreed to segregate U.S. investor assets, recognize that U.S. investors hold legal title to those assets, and not lend, stake, or otherwise use those assets in risky speculative activities.
“Washington DFI is proud of the collaborative work we do with other states and with our federal counterparts,” DFI Director Charlie Clark said. “When we all work together, we get a better picture of how some of these companies are skirting the law – whether intentionally or not – in ways that put investors at risk. Together, we are able to take actions like this to keep the people of Washington safe from unlicensed, unprotected activity.”
Washington State DFI continues to investigate the offer and sale of interest-bearing cryptocurrency accounts, and will consider enforcement actions against firms that offer these accounts without complying with state law.
Firms that need to register and deal with past unregistered activity should reach out to DFI’s Division of Securities, either online at https://dfi.wa.gov/securities or by mail, phone or fax at:
Department of Financial Institutions Securities Division
P.O. Box 9033
Olympia, WA 98507-9033
Main Telephone: 360-902-8760
Toll Free Telephone: 877-RING DFI (746-4334)
Washington State investors are encouraged to use DFI’s licensee database or contact the Securities Division to verify the registration status of a firm before investing their money.
If you are a client of Nexo with complaints about your EIP account, please file a complaint with Washington State DFI online at File Securities and Investment Complaints.
The action against Nexo comes on the heels of similar actions filed by Washington DFI and by other working group members.
Additionally, recent bankruptcies of a few major companies have revealed that consumers holding accounts at these types of companies may be considered unsecured creditors. Investors also should be aware that funds held on cryptocurrency trading platforms are likely not insured by the FDIC. Recently, the FDIC issued a Fact Sheet clarifying when an account is considered FDIC insured.
Tips for Investors:
- Understand what you’re investing in:
- Research the company prior to investing – know their performance history.
- Verify whether a company is licensed and regulated in the State of Washington.
- Check the terms and conditions of the account agreement to make sure you understand your rights under the terms of the agreement. Consumers should understand this may mean scrolling through many pages of “fine print” and/or requesting additional information directly from the company to fully understand the risks.
- Never invest more than you can afford to lose and maintain a diversified investment portfolio to help weather the market ups and downs.
- Understand there are risks:
- DFI Alert: Risks of Buying, Investing, and Trading Virtual Currencies
- SEC.gov | Crypto Assets and Cyber Enforcement Actions
- DFI Alerts
- Contact the company immediately if you have concerns.
- If you feel you’ve been defrauded, file a complaint.