The US Securities and Exchange Commission (SEC) is known for coming down hard on the digital assets industry, including accusing several firms of trading “unregistered securities.” This time around, the regulator has charged a crypto fund with misleading investors, marking the “first violation of the SEC’s amended marketing rule.”
Crypto Fund Promised Investors 2,700% Returns
In a release dated August 21, the SEC charged a New York-based FinTech firm Titan Global Capital Management, for “misrepresenting hypothetical performance of investments.” According to the regulator, the hypothetical performance metrics which the company used in advertising were misleading.
Titan is said to have offered investment services to retail investors through its mobile trading app between August 2021 to October 2022. As part of its advertising campaigns, it misrepresented the fund’s hypothetical performance and promised investors an annual return of 2,700% for its crypto fund.
The SEC alleges that these representations misled clients because Titan failed to inform potential investors that the “annualized” performance results were based on projections from the fund’s performance in its first three weeks, and there was no assurance that it would enjoy such positive results throughout the year.
As such, the agency stated that Titan violated the marketing rule “by advertising hypothetical performance metrics without having adopted and implemented required policies and procedures” and also failed to adhere to the guidelines stipulated in the Commission’s marketing rule.
Total market cap trailing $1.032 trillion | Source: Crypto Total Market Cap on Tradingview.com
SEC’s Marketing Rule
The Commission updated Rule 206 (the marketing rule) of the Investment Advisers Act in 2020, and part of the amendments focused on disclosures made by investment advisers like Titan.
As in this case, the amended rule made provisions for using hypothetical performance metrics. However, these advisers were required to comply with requirements that the SEC had designed to prevent fraud.
As part of these requirements, Titan was meant to have provided potential investors with certain information underlying the hypothetical performance. However, it failed to do so and rather painted a “misleading picture of certain of its strategies for investors.”
Titan was also charged with other violations, including making “misleading disclosures” to clients about the custody of their crypto assets. Titan also gave clients the impression that they couldn’t bring certain causes of action against the company as the client agreements contained non-waivable clauses.
Additionally, the company failed to get clients’ authorization before carrying out specific trades with their assets.
Titan agreed to cooperate with the Commission on its finding that it violated the Advisers Act. So it will comply with the SEC’s cease-and-desist order as part of the agreement. The company will also return $192,454 representing profits from its wrongful conduct and pay an $850,000 civil penalty that will be distributed to affected investors.
