The SEC Is Now Looking at the Beginning of the Crypto Capital Funnel — the VCs

The US Securities and Exchange Commission has subpoenaed at least three crypto venture capital firms this year, according to a source familiar with the SEC's investigation.

The US Securities and Exchange Commission has subpoenaed at least three crypto venture capital firms this year, a source familiar with the SEC’s investigation told DL News.

One subpoena was titled “in the matter of certain crypto asset offering intermediaries,” according to the first page viewed by DL News.

“The staff of the United States Securities and Exchange Commission is conducting an investigation relating to the above-referenced matter to determine if violations of the federal securities laws may have occurred,” the page reads.

DL News viewed the subpoena on the condition that it not reveal whom the SEC targeted.

The SEC’s investigation of crypto VCs signals that the agency is now looking at the beginning of the crypto capital funnel — the investors from whom the vast majority of crypto startups get their initial cash.

At least two other crypto VCs received essentially identical document requests, said the person, who declined to be named citing restrictions on commenting publicly on the matter.

The subpoenas sent to the crypto VCs asked for any contract for any token deal the investors have ever done, the source added.

“It’s an overreaching fishing expedition and an incredibly expensive one,” said a lawyer at a crypto VC unaffected by the subpoenas.

The lawyer, who had previously heard about the investigation before he spoke with DL News, asked not to be named speaking publicly about the SEC.

Elisha Kobre, an attorney at Bradley Arant Boult Cummings who specializes in securities and commodities fraud, said that SEC scrutiny of VCs is plausible.

“It’s a natural additional enforcement area that the SEC would consider pursuing,” he told DL News.

Widening crypto crackdown

The development follows earlier hints that the SEC crackdown on crypto is widening.

In July, Ari Paul, the chief investment officer of institutional investor BlockTower Capital, said in a podcast that the agency is investigating crypto VCs.

However, Paul did not elaborate on who is being targeted or the nature of the investigations.

And he did not respond to a request for comment from DL News.

“The SEC does not comment on the existence or nonexistence of a possible investigation,” an SEC spokesperson told DL News.

After the fall of crypto exchange FTX in November 2022, the SEC has cracked down on the digital assets industry.

It targeted influencers and projects including billionaire Justin Sun, founder of the Tron blockchain, and Do Kwon, the founder of Terraform Labs awaiting extradition to his native South Korea.

In June 2023, it sued Binance and Coinbase, and it recently told Uniswap, a decentralized exchange, that it was the target of pending litigation.

Statutory underwriters

Paul, the BlockTower Capital executive, speculated that the SEC’s investigation was prompted because the agency suspected that VCs may be acting as marketers of tokens.

When some investors hype up a token, that could be construed as acting as a securities dealer, Paul said.

The source familiar with the investigation said the financial regulator may be interested in whether crypto VCs are “statutory underwriters.”

Statutory underwriters are broker dealers that buy securities with the intent to distribute them to the public.

Many crypto startups submit records of token fundraises to the SEC.

However, startups usually file for an exemption from the registration of their securities with the agency, since they’re only offering accredited investors the right to future tokens.

The SEC is therefore interested in whether these accredited investors are proxies for token issuers to release unregistered securities to the wider retail market, the source said.

“It poisons the initial issuance,” the person added, in reference to what happens when investors allegedly sell tokens to the public market.