A recent class- action lawsuit alleges that the “Uniswap Protocol” exchange is one of the largest crypto-asset exchanges in the world, which permits the unlawful promotion, offer, and sale of crypto tokens as unregistered securities. According to the complaint, Uniswap has no barriers to entry for users looking to trade or swap crypto tokens on the exchange. It requires no verification of an individual’s identity and conducts no “know-your-customer” (KYC) process, leading to rampant fraud. The complaint further alleges that Uniswap has enriched itself and the other defendants (including its VC backers) by collecting fees for issuers on every transaction executed on the exchange that is not disclosed in a transparent manner, in violation of securities laws. Other allegations are that Uniswap offered and sold unregistered securities throughout the United States on its exchange without registering as a national securities exchange or as a broker-dealer and without there being any registration statements in effect for the tokens it was selling, all in violation of applicable law.
The complaint further alleges that had the tokens been registered as required, the defendants would have received necessary and meaningful disclosures that would have enabled them to reliably assess the representations being made by the issuers and the riskiness of their investments, but that without these disclosures, they were left to fend for themselves and subject to rampant fraud.
With respect to the VC backers of Uniswap, the complaint alleges that they aided and abetted Uniswap’s: i) failure to register as an exchange or broker-dealer; ii) offer and sale of securities on an unregistered exchange and operation as an unregistered broker-dealer; and iii) solicitation of securities.
As we have noted in previous posts, the SEC has flagged decentralized exchanges as a topic on which they are focused. For example, as reported here, the SEC recently issued proposed amendments to the Securities Exchange Act that would significantly broaden the definition of “exchange” for purposes of regulation under the Exchange Act to address a “regulatory gap”.
This undoubtedly, will be a closely watched case. Check back for updates.
Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 108