In the Matter of Linus Financial, Inc.

Summary

Linus Financial, Inc. (“Linus”) has agreed to settle this administrative action with the SEC. According to the Order Instituting Cease and Desist Proceedings, Linus began offering and selling interest-bearing accounts to U.S. investors in March 2020. The currency deposited into these accounts was converted into USDC, a “crypto asset.” Linus then transferred the USDC to “liquidity pools on purportedly ‘decentralized’ finance platforms that are powered by smart contracts” or lent the USDC directly to 3rd party institutional borrowers. By March 2022 Linus had approximately $5.2 million in assets earning interest.

Because Linus’s agreement with investors was an investment contract, and was not registered with the SEC, the SEC found that Linus violated Sections 5(a) and 5(c) of the Securities Act. The interest rate that Linus offered investors was between 3.5%-4.5% APY, which was generally better than what investors would receive from a bank account at the time.

Linus was ordered to cease offering securities, but not ordered to pay a civil penalty, and no monetary sanctions appear in the order.

Opinion

First, why would investors bother? Sure, 3.5-4.5% is better than a bank account, but doesn’t seem like it would outperform a dividend-paying index fund.

Second, why not just register? Based on the content of the order instituting proceedings, it looks like Linus otherwise did everything right. It made its interest payments to investors, and returned all of their capital once the SEC announced its settlement with BlockFi Lending. Is the cost and administrative burden of registration so great that it would undercut the rate of return? Couldn’t Linus just charge investors a small annual fee to cover these costs?

Third, this is a win for Linus. Since there were no financial penalties ordered, it gets to keep whatever profits it made. Indeed, no principal of Linus is individually named, so he appears to be unrestricted from incorporating a similar business and registering it with the SEC. Perhaps this answers my first two questions.