On July 21, 2022, The Securities and Exchange Commission (“SEC”) filed a complaint in the US District Court for the Western District of Washington against Ishan Wahi, a former Coinbase product manager, his brother, and his friend for perpetrating a securities insider trading scheme.

According to SEC’s complaint, while employed at Coinbase, Ishan Wahi helped to coordinate the platform’s public listing announcements which included the crypto assets that would be made available for trading. Coinbase treated such information as confidential and warned its employees not to trade on the basis of, or tip others with, that information. However, from at least June 2021 to April 2022, Ishan repeatedly tipped the timing and content of upcoming listing announcements to his brother and his friend. Those announcements usually resulted in an increase in the assets’ prices. Ishan’s brother and friend allegedly purchased at least 25 crypto assets, and then sold them shortly after the announcements. The alleged insider trading scheme generated profits totaling more than $1.1 million.

​To establish an insider trading claim, SEC must show the crypto assets traded by the defendants were securities. SEC listed nine crypto assets (i.e., AMP, RLY, DDX, XYO, TRGT, LCX, POWR, DFX, and KROM) as securities in its complaint, claiming that those nine crypto assets pass the Howey Test. Under the Howey Test, a transaction constitutes an investment contract, and therefore, securities, if the transaction is an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.

Whether a crypto asset is securities is highly controversial and facts specific. There is no certainty as to whether SEC’s allegation that those nine crypto assets constitute securities will be upheld by the court. However, there is a seen trend that the SEC is taking a more aggressive approach in evaluating the characteristics of crypto assets and regulating crypto assets.

Although the instant case is far away from being resolved, prospective investors of crypto assets should be aware of the regulatory risks associated with investing and trading crypto assets and private funds should ensure to disclose such regulatory risks to their prospective investors in the offering documents.