- The SEC approved Coinbase’s public listing, but later sued the company, sparking debates about the regulator’s procedures and reasoning.
- Experts argue that the SEC’s approval of a public listing is not an endorsement of the business or its future strategies but is based on fulfillment of certain disclosure and regulatory requirements.
The paradoxical scenario of the SEC suing Coinbase, after permitting its public listing, has drawn industry-wide attention and stirred conversations about the securities regulator’s operations. It’s essential to understand, however, that the SEC does not formally “approve” a direct listing, but rather assesses whether the company has met specific prerequisites.
The @SECGov is weaponizing their role to kill an industry. Allowing a company to list publicly and then stonewalling their attempts to register is indefensible. @GaryGensler, expect to hear from Congress.https://t.co/GdprSW1Yns
— Senator Bill Hagerty (@SenatorHagerty) June 6, 2023
In April 2021, Coinbase first announced that the SEC had “declared effective” its Form S-1 registration—a preliminary registration form for new securities—related to the proposed public direct listing of its Class A common stock. Yet, in an intriguing turn of events, the SEC sued Coinbase on the accusation of operating as an unregistered exchange since at least 2019.
The SEC’s lawsuit incited a wave of criticism, notably from Coinbase’s Chief Legal Officer Paul Grewal and prominent crypto podcaster Scott Melker. They contend that the enforcement-only stance of the SEC amidst ambiguous crypto regulations jeopardizes companies like Coinbase, which prioritize compliance. Melker branded the SEC’s backtrack as nonsensical.
Industry insiders have also weighed in on the situation, alleging that the lawsuit contradicts the SEC’s prior approval of Coinbase’s public listing. However, Joe Carlasare, a partner at the law firm Amundsen Davis LLC, sheds a different light on the matter. According to him, the SEC’s approval of a registration statement is managed by a distinct division within the regulatory body.
The focus is to ensure that the company discloses all necessary information and doesn’t obscure facts from investors. The greenlight, therefore, doesn’t imply endorsement of potentially unlawful underlying activity.
Bruce Fenton, Managing Director at blockchain startup Chainstone Labs, echoes this sentiment. He affirms that the SEC’s approval of a public offering doesn’t pass judgment on the business itself but validates the completeness of the registration statement, including necessary audits and disclosures.
Coinbase’s appointment of Deloitte as its independent registered public accounting firm, a year before its public listing, also plays into the context. Though it might seem peculiar for the SEC to litigate against a company it essentially sanctioned to go public, this move doesn’t endorse or safeguard any future strategic shifts the company might make, as highlighted by Morningstar Analyst Michael Miller.
Furthermore, Miller mentions that Gary Gensler, the SEC’s chair, stepped into his role in the same month Coinbase went public, implying the preexistence of the SEC’s effective declaration. It’s worth noting, too, that after going public, Coinbase expanded the number of cryptocurrencies it was listing on its exchange.
Coinbase has remained adamant since receiving a Wells notice from the SEC in March that it does not list securities. Its April filing mentions extensive efforts to engage with the SEC during the public listing process and beyond, thereby stating that the move toward litigation did not arise from new discoveries about Coinbase’s operations.
