NEWARK – Attorney General Matthew J. Platkin and the Bureau of Securities (the “Bureau”) today announced that Nexo Capital Inc. (“Nexo”) has reached a $45 million settlement agreement with state and federal securities regulators over Nexo’s illegal offer and sale of unregistered securities in the form of interest-bearing digital asset deposit accounts.
Nexo, a Cayman Islands corporation formed in 2018, provided crypto-asset-related financial services, including Earn Interest Product (“EIP”) accounts. Nexo’s EIP accounts promised to pay investors interest in cryptocurrency deposited in a Nexo “crypto interest account.”
“Cryptocurrency-related investments may be a new way for investors to grow their portfolios, but those investments must still follow the same rules and regulations as other securities,” said Attorney General Platkin. “This settlement shows our continued dedication to protecting New Jersey investors in these new markets and sends a clear message to companies that they must comply with state and federal laws.”
A North American Securities Administrators Association (“NASAA”) working group of state securities regulators conducted a comprehensive investigation into Nexo’s EIP program. During the investigation, regulators discovered that EIP investors could passively earn interest on digital assets by loaning those assets to Nexo. Nexo maintained total discretion over the revenue-generating activities used to earn returns for investors. The company offered and promoted the EIP and other products to U.S. investors via its website and social media channels, suggesting in some instances that investors could obtain returns as high as 36%.
“Many see the possibility of high rewards associated with investing in cryptocurrencies, but do not realize the high risks that come with them as well,” said Cari Fais, Acting Director of the Division of Consumer Affairs. “Interest-bearing cryptocurrency accounts lack the regulatory oversight needed to protect New Jersey investors. We will continue to enforce laws related to these products.”
As of July 31, 2022, Nexo had 93,318 EIP investors in the U.S. with total EIP assets valued at approximately $800 million, of which 2,050 were New Jersey residents, with total EIP assets valued at approximately $36 million.
“Investors continue to be at risk from unregistered entities that do not provide adequate disclosure of the risks of their investments,” said Acting Bureau Chief Amy Kopleton. “The Bureau cautions investors to always thoroughly vet each investment and check the registration status of the person offering it before handing over their hard-earned funds.”
Nexo agreed to pay a $22.5-million penalty to settle the allegations with the Bureau, other U.S. states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The U.S. Securities and Exchange Commission entered into a separate settlement with Nexo for the same penalty amount.
Nexo also agreed that it will cease and desist from offering its EIP and stop providing interest or other returns on any existing New Jersey investors’ EIP accounts until such securities are registered, qualified, or otherwise exempt from registration.
The Bureau’s investigation was handled by Investigator Delfin Rodriguez of the Bureau of Securities, within the Division of Consumer Affairs. The Bureau is represented by Deputy Attorney General Evan A. Showell, Assistant Section Chief of the Securities Fraud Prosecution Section within the Division of Law’s Affirmative Civil Enforcement Practice Group, along with Section Chief Victoria A. Manning.
The Bureau is charged with protecting investors from investment fraud and regulating the securities industry in New Jersey. It is critical that investors “Check Before You Invest.” Investors can obtain information, including the registration status and disciplinary history, of any financial professional doing business to or from New Jersey, by contacting the Bureau toll-free within New Jersey at 1-866-I-Invest (1-866-446-8378) or from outside New Jersey at (973) 504-3600, or by visiting the Bureau’s website at www.NJSecurities.gov. Investors can also contact the Bureau for assistance, or to raise issues or complaints about New Jersey-based financial professionals or investments.