Court Says SEC Could Have Informed Coinbase That Exchange Was Violating Securities Law Prior to Public Listing

A New York federal judge says the U.S. Securities and Exchange Commission (SEC) could have given Coinbase a heads-up that it could be violating securities laws before approving its application to go public.

The SEC filed a lawsuit against Coinbase in June alleging that the Nasdaq-listed firm sold unregistered securities.

During the pre-trial conference, SEC counsel Peter Mancuso says the agency’s approval of Coinbase’s S-1 application to conduct an initial public offering (IPO) does not mean the commission ever gave its stamp of approval to the crypto exchange’s entire business.

“Simply because the SEC allows a company to go public does not mean that the SEC is blessing the underlying business or the underlying business structure or saying that the underlying business structure is not in violation of the law.

There is no evidence being put forth that the SEC looked at specific assets and made specific determinations and then gave Coinbase comfort that this would not later be found to be a security.”

District Judge Katherine Polk Failla says she wonders why the SEC didn’t warn Coinbase beforehand of any regulatory grey areas. She says the agency could have given the exchange advice or warning before green-lighting the public listing.

“I am not saying that the commission should be omniscient at the time it’s evaluating a registration statement and that it should know all things. But I would have thought the commission was doing diligence into what Coinbase was doing, and somehow I thought that it would say, you know, you really shouldn’t do this. This is violative of the securities laws, or we are kind of in some interesting unchartered territory here with respect to whether the assets on your platform are securities, so be forewarned that maybe someday there could be a problem.”

The judge also says that it does make sense for Coinbase to assume that it was in the clear considering that the crypto exchange received no warning from the SEC prior to its IPO.

“You never could have said to them, ‘Hey, you guys need to register as a securities exchange.’ That was within the power of the SEC to do, was it not…?

It’s not crazy in the Failla parlance for Coinbase to think that what they were doing was OK because it was exactly what you let them do when they issued the S-1.”