BarnBridge SEC Settlement: $1.7M Agreement with DAO Founder
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BarnBridge SEC Settlement: BarnBridge DAO and its founders will pay the SEC over $1.7 million to settle allegations of failing to register the offer and sale of BarnBridge’s structured crypto asset securities.
The SEC disclosed in a recent press release that BarnBridge DAO, along with founders Tyler Ward and Troy Murray, is set to pay more than $1.7 million for not registering the offer and sale of BarnBridge’s SMART Yield bonds, a variant of structured crypto asset securities.
BarnBridge and its founders face additional charges related to the operation of SMART Yield pools, accused of functioning as unregistered investment companies.
To resolve the SEC charges, BarnBridge will surrender nearly $1.5 million in proceeds from the sales. Furthermore, both Ward and Murray will individually pay civil penalties of $125,000 each.
Gurbir S. Grewal, director of the SEC’s Division of Enforcement, emphasized, “The use of blockchain technology for the unregistered offer and sale of structured finance products to retail investors violates securities laws.” This case serves as a vital reminder that these laws apply universally, regardless of the incorporation, decentralization, or autonomy claims.
BarnBridge and its founders extensively promoted SMART Yield bonds as akin to asset-backed securities to the general public, as per the release.
Investors could choose between “Senior” or “Junior” SMART Yield bonds on BarnBridge’s website. The SMART Yield system pooled crypto assets from investors, using them to generate fixed or variable returns.
As per the orders, SMART Yield attracted investments surpassing $509 million from diverse investors. BarnBridge earned fees based on investors’ chosen yield option and the size of their investment.
In October, the BarnBridge DAO voted to comply with potential SEC demands, agreeing to pay fines if necessary. The DAO also approved the treasury to “sell all tokens it is permitted to sell” if required, though the SEC’s ruling on this remains unclear.
Summary : BarnBridge SEC Settlement
- In 2020, Ward and Murray established “BarnBridge,” a blockchain-based enterprise for trading structured finance-type investments in pooled crypto asset vehicles. They launched BarnBridge in August 2020, introducing a white paper, attracting investors, and forming a decentralized autonomous organization (DAO) named BarnBridge DAO. From March 2021 to May 2023, BarnBridge DAO publicly offered and sold structured crypto asset securities known as SMART Yield bonds in unregistered transactions, accumulating over $509 million in investments. The BarnBridge DAO, through BarnBridge.com, provided variable and fixed returns to SMART Yield investors, collecting fees in the process.
- Ward and Murray spearheaded the infrastructure for BarnBridge DAO’s operations. Ward managed the BarnBridge.com website and investment application, establishing repositories on platforms like Medium, Github, and Discord for BarnBridge-related projects and discussions. The website featured anticipated investor returns related to SMART Yield.
- Using social media, Ward and Murray promoted SMART Yield’s investment potential and returns. They appeared on YouTube channels focused on decentralized finance and authored articles, including a white paper on Medium and Github, elucidating SMART Yield’s potential returns and other BarnBridge product development plans.
- The White Paper defined SMART Yield bonds as a fixed income product offering fixed or variable gains through investing in Senior (guaranteed return) or Junior (variable return) tranches of SMART Yield investment pools. Investor assets were exchanged for crypto assets from third-party lending platforms, generating interest income for the Pools. In case Senior investors’ guaranteed yield was not met, SMART Yield directed Junior investors’ capital to compensate, benefiting Junior investors when excess returns occurred.
- Ward and Murray, integral to the core team, controlled a multi-signature digital address to pay vendors and raise funds for executing White Paper goals and launching SMART Yield. They oversaw BarnBridge’s website, SMART Yield Pool development, and hired programmers on behalf of BarnBridge. As the largest individual holders of voting power in BarnBridge DAO, every proposal required Ward and Murray’s votes for approval.
- Starting March 2021, BarnBridge DAO’s initial offering attracted investors globally, lacking mechanisms to verify accreditation or locations.
- From March 12, 2021, to March 2023, SMART Yield Pools received over $509 million from 1,235 unique crypto addresses. Of these, 665 addresses invested less than $10,000 each, while 72 addresses invested at least $1,000,000.
- Ward and Murray violated Securities Act Sections 5(a) and 5(c) by selling SMART Yield bonds as unregistered securities. Additionally, they caused the Pools to breach Investment Company Act Section 7(a) by offering unregistered investments in SMART Yield Pools.
Violations
Under Section 2(a)(1) of the Securities Act, a “note” falls under the definition of a security. Unless a note closely resembles non-security instruments, courts assess four factors: (1) parties’ motivation; (2) distribution plan; (3) public investing expectations; and (4) risk mitigation factors, like an alternative regulatory regime. (See Reves v. Ernst & Young, 494 U.S. 56, 64–66, 1990; SEC v. Thompson, 732 F.3d 1151, 1159, 10th Cir. 2013).
Section 5(a) of the Securities Act prohibits selling securities without an effective registration statement. It is unlawful to use transportation, communication means, or mails for sales through a prospectus or carry securities for sale or delivery after sale.
Section 5(c) of the Securities Act prohibits offering to sell or buy securities through transportation, communication means, or mails without a filed registration statement.
Respondents didn’t file a registration statement or have exemptions for SMART Yield products’ offers and sales.
Ward and Murray violated Sections 5(a) and 5(c) of the Securities Act by substantially participating in SMART Yield products’ offer and sale.
Subject to exceptions, investment companies must register with the Commission to sell investments. Section 7(a) of the Investment Company Act states that no investment company shall sell securities unless registered under section 8.
The SMART Yield Pools, operated by BarnBridge DAO, comprised investment securities, selling notes to profit-seeking investors. Ward, Murray, and BarnBridge DAO violated Section 7(a) of the Investment Company Act by not registering SMART Yield Pools.
Ward and Murray caused the Pools to violate Section 7(a) of the Investment Company Act due to their conduct.