The Securities and Exchange Commission broke new ground in the regulation of digital assets Tuesday, when it announced enforcement action against California-based hedge fund Crypto Asset Management.
CAM “offered a fund that operated as an unregistered investment company while falsely marketing it as the ‘first regulated crypto asset fund in the United States’,” the SEC said in the announcement. To settle the matter, CAM and its founder Timothy Enneking agreed to a censure, a $200,000 fine, and to cease any violations of specific securities rules. They did not have to confirm or deny the charges.
In a phone interview with Institutional Investor, Enneking suggested the regulator’s desire to “make a point” motivated its action against the firm.
The SEC accused CAM and Enneking of raising $3.6 million between August and December of 2017, mainly from individuals, for its Crypto Asset Fund (CAF), without being registered as an investment company. The firm and its founder “also negligently misrepresented to actual and prospective investors in certain marketing materials that CAF was the ‘first regulated crypto asset fund in the United States’ and had filed a registration statement with the Commission,” the SEC’s order stated.
Enneking’s fund managed $37 million at the end of 2017 — tiny by hedge fund standards — and he is the sole proprietor.
“Will you find for me another example of the SEC going through all of this for $3.6 million?” he asked rhetorically, before acknowledging that he is not a securities lawyer and does not know for certain if there are other instances. “The real reason we’re having this conversation is because the SEC wants to make a point. That point is, ‘Crypto funds, you’re dealing with securities. Crypto assets are securities.’ That’s the reason I submit that the SEC — I can’t speak for them — wanted to reinforce.”
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Both Enneking and the SEC’s order highlighted CAM’s immediate cooperation with the regulator.
“This was all handled very amicably,” said the crypto firm’s founder. At issue “were two statements that appeared on our website: one statement referred to ‘regulated,’ which the SEC didn’t like. Another was an incorrect disclaimer in small print, in a footnote. We immediately took them down in November.”
He stresses that while “ignorance is no excuse,” he and CAM did not deliberately violate securities law, and that “no investors were harmed.” He also acknowledged, when asked, that CAM wasn’t registered as an investment company during the fundraising months in question, as the SEC said it should have been.
In determining to accept the settlement offer, the SEC said in the order that “the Commission considered remedial acts promptly undertaken by respondents and cooperation afforded the Commission staff.”
Crypto Asset Management remains a going concern, Enneking said. He declined to comment on the firm’s current assets under management or performance track record. “I’m not allowed,” he said, adding that CAM had brought on a chief legal officer to lead compliance efforts.
“Today happens to be my birthday — for me it’s a very good day,” the founder reflected late Tuesday, hours after the SEC announced their settlement. “I’ve been carrying this weight around for a long time.”