Robinhood (HOOD) said it received a warning from the Securities and Exchange Commission that the trading platform could face an enforcement action related to its U.S. crypto operations.
The so-called Wells notice, which Robinhood received on May 4, said SEC staff had made a “preliminary decision” to recommend the action due to securities broker and transfer agent registration violations.
However, the company’s shares rose more than 1% in early morning trading on Monday, after falling as much as 7% before the market opened.
Robinhood warned in its disclosure that a potential SEC lawsuit could mean a civil lawsuit and a public trial that could end in a fine, a cease-and-desist order and other restrictions on its crypto activities.
“After years of good faith attempts to work with the SEC to provide regulatory clarity, including our well-known attempt to come in and register, we are disappointed that the agency has decided to issue a Wells notice,” Robinhood’s boss said -Head of Legal and Compliance. and corporate affairs officer Dan Gallagher said in a blog post.
As part of a wide-ranging crackdown on the industry, the SEC has prosecuted a number of firms that allowed U.S. customers to trade cryptocurrencies.
Last June, the agency filed a lawsuit against the largest U.S. cryptocurrency exchange, Coinbase (COIN), alleging that it was operating an unregistered exchange by allowing the sale of certain crypto tokens that the agency considers to be investment securities – and therefore in the fall within the jurisdiction of the SEC.
Coinbase and its CEO Brian Armstrong are currently fighting these allegations. They have argued that cryptocurrencies sold through the exchange are more like baseball cards than securities.
The regulator made a similar argument in a separate lawsuit against Binance, arguing that the exchange also allows trading of certain digital currencies on its platform that should have been registered with the SEC.
Robinhood’s chief legal officer made the same argument as Coinbase on Monday, saying: “We firmly believe that the assets listed on our platform are not securities and we look forward to working with the SEC.” “To make clear how weak the arguments against Robinhood are. “Crypto would be consistent with both the facts and the law.”
Robinhood has previously said its crypto business was under investigation by the SEC, with the trading venue disclosing that the SEC had sent subpoenas.
What could mitigate this legal threat for Robinhood is that the trading firm generates much less of its total revenue from crypto trading compared to companies that are more focused on cryptocurrencies, Mizuho analyst Dan Dolev explained in a research note on Monday.
In the fourth quarter of 2023, Robinhood reported total net revenue of $471 million, of which 9.13% came from crypto-related transaction fees.
“In our view, concerns about the communication are likely overblown,” said Dolev, who rates Robinhood shares “Buy.”
Robinhood reports first-quarter results after the market close on Wednesday.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, crypto and other financial areas.
Click here to get the latest crypto news, updates and more ether And Bitcoin Prices, crypto ETFs and cryptocurrency market impact
Read the latest financial and business news from Yahoo Finance