SEC Sets Sights on Robinhood's Crypto Trading Arm for Potential Action

Robinhood, a well-known online trading platform, disclosed that its cryptocurrency division, Robinhood Crypto, received a "Wells notice" from the U.S. Securities and Exchange Commission (SEC) on May 4. The notice pertains to the platform's cryptocurrency listings, custody practices, and operational activities. Robinhood stated its cooperation with the ongoing investigation.

A Wells notice serves as a preliminary warning issued by the SEC before initiating a civil lawsuit against a publicly traded company in the United States. Upon receiving the notice, the company can engage in discussions and negotiations with the regulatory agency before an official lawsuit is filed.

According to the "Wells Notice" issued by the Staff of the SEC, the Staff has made a "preliminary determination" to recommend that the SEC take enforcement action against Robinhood Crypto. The alleged violations include Sections 15(a) and 17A of the Securities Exchange Act of 1934, as amended.

The potential actions by the SEC may involve a civil injunctive action, a public administrative proceeding, and/or a cease-and-desist order. Remedies sought by the agency may include an injunction, a cease-and-desist order, disgorgement, pre-judgment interest, civil money penalties, censure, revocation, and limitations on activities.

Dan Gallagher, Robinhood's Chief Legal, Compliance, and Corporate Affairs Officer, and former SEC Commissioner expressed disappointment, saying, "After years of good faith attempts to work with the SEC for 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 related to our U.S. crypto business."

Robinhood had previously heeded the SEC's calls and attempted to register with the regulator as a special purpose broker focusing on digital assets but was unsuccessful.

Gallagher further added, "We firmly believe that the assets listed on our platform are not securities and we look forward to engaging with the SEC to make clear just how weak any case against Robinhood Crypto would be on both the facts and the law."

In the past, Robinhood discontinued support​ for Cardano (ADA), Polygon (MATIC), and Solana (SOL) in June of 2023. These three tokens were explicitly referenced as securities in SEC lawsuits filed against other cryptocurrency exchanges such as Binance and Coinbase.

This is not the first time Robinhood has received an investigative subpoena from the SEC regarding its crypto operations. In February of the previous year, the company received a similar subpoena related to its cryptocurrency listings, custody practices, and platform operations.