FTX Trading and its billionaire founder, Sam Bankman-Fried, are being investigated by Texas securities regulators over whether certain lending offerings violate state law.
Texas is investigating whether the company’s yield-bearing crypto accounts are illegal securities offerings sold to U.S. residents, according to an Oct. 14 filing in the bankruptcy of Voyager Digital Holdings. Until the state determines FTX is in compliance with the law, the agency said the company should not move forward with the $1.4 billion purchase of Voyager assets announced last month.
Texas State Securities Board enforcement director Joe Rotunda said he was able to access the company’s vesting program despite FTX not being registered with the state, according to the filing. In general, investments are labeled as securities when there is an expectation of a profit from management.
Rotunda also cited an article linked to by FTX’s app, which explains that users can earn returns by participating in bets.
The state’s securities regulator detailed the investigation in bankruptcy court documents in which it objects to FTX’s purchase of Voyager after winning an auction. The federal judge overseeing Voyager’s bankruptcy will consider the objection before deciding whether to proceed with the sale.
“We have an active application for a license that has been pending and believe we are operating fully within the limits of what we can do in the meantime,” according to an FTX spokesperson. “We are working exceptionally hard to ensure that Voyager customers get the best possible outcome – which we believe will happen if our bid to return assets to users is approved by the Voyager bankruptcy court.”
Rotunda did not immediately respond to a request for comment.
The US Securities and Exchange Commission and government investigators have been looking into whether accounts offered by crypto lenders are akin to securities that should be registered with regulators. In February, the SEC and state regulators levied a record $100 million fine against BlockFi, a popular virtual currency exchange, for failing to register products that pay customers high interest rates to lend their digital tokens.
Bankman-Fried has been on a shopping spree for distressed assets during the crypto downturn, earning him comparisons to John Pierpont Morgan in the 1907 banking crisis. But his crypto empire has also come under the attention of some regulators. In August, FTX US received a cease-and-desist letter from the Federal Deposit Insurance Corp. due to “false or misleading statements” that certain products are eligible for insurance protection.
Matt Robinson and Yueqi Yang, Bloomberg
