John Reed Stark, the founder of the SEC’s Office of Internet Enforcement and former chief for 11 years, argues that Coinbase’s IPO approval does not imply the SEC’s approval of all their future actions.
Last week, the SEC filed a lawsuit against Coinbase, accusing the leading U.S. crypto exchange of operating as an unregistered securities exchange, broker, and clearing agency. Coinbase CEO Brian Armstrong responded to the lawsuit on Twitter, pointing out that the SEC had reviewed their business and allowed them to go public in 2021 through their approved S-1 IPO filing.
Stark points out that Coinbase’s own S-1 document acknowledges the potential for regulatory scrutiny in the future regarding securities classifications.
Stark emphasizes that the SEC’s review aims to ensure investors have all the necessary information before purchasing securities, not to validate the legitimacy of a business. The SEC’s staff examines registration statements to assess compliance with disclosure rules, nothing more.
The former SEC official further explains that the SEC does not evaluate the quality of securities offerings or determine their suitability for investors. Additionally, approval of a registration statement does not constitute an endorsement of a company’s products, services, or an affirmation of its lawful operation.
Drawing parallels, Stark highlights that the SEC does not approve drugs sold by pharmaceutical companies or assess the safety of vehicles sold by automotive businesses.
In fact, Stark goes as far as to call Armstrong’s argument “criminal,” highlighting the necessity for an “SEC No Approval Clause” on prospectuses or offering documents provided to investors. This clause explicitly states that the SEC has not approved or disapproved the securities and any contrary representation is a criminal offense.
