Court Denies Gemini and Genesis Motion in SEC Case Over Gemini Earn Program

A federal court has rejected a joint motion by cryptocurrency exchange Gemini and Genesis Global Capital to dismiss the Securities and Exchange Commission's (SEC) case related to their now-defunct Gemini Earn program, according to a filing on March 13.

The court also denied the companies' request to strike the SEC's demands for permanent injunctive relief and disgorgement.

The SEC's complaint "plausibly alleges" that Gemini and Genesis offered and sold securities through Gemini Earn, applying the Howey and Reves tests.

Howey Test Applied

One aspect of the Howey test examines Gemini Earn's status as an investment contract. The court found that the SEC adequately claimed common enterprise and horizontal commonality, indicating pooling of assets to tie investor fortunes together.

Gemini and Genesis had argued that the market rate-based payouts and customers' ability to exit the agreement at any time negated common enterprise and horizontal commonality. However, the court deemed these arguments "not persuasive."

The court also noted that Gemini Earn agreements stating loans were meant to act as commercial loans rather than securities did not necessarily reflect economic reality under the test.

Furthermore, the court determined that the SEC sufficiently demonstrated that Earn investors anticipated profits from their investments.

Reves Test Supports SEC

Under the SEC's Reves test, Genesis did not challenge the presumption that every note is a security.

Gemini and Genesis' arguments were deemed "in tension with the broad scope of the securities laws" in this regard, considering both parties' motivations were investment-oriented rather than commercial. Genesis aimed to generate revenue through lending, while investors were attracted by the promise of high interest rates.

The wide distribution of agreements to a broad public segment, along with investors' reasonable expectations of profits, supported this classification. The court also noted the absence of alternative regulatory schemes or other risk-reducing factors, solidifying the determination that Gemini Earn agreements constitute securities under the Reves test.