Robinhood (HOOD) said it received a Securities and Exchange Commission warning that the trading platform could face an enforcement action related to its US crypto business.
The so-called Wells notice that Robinhood got May 4 stated that the SEC’s staff made a "preliminary determination" to recommend the action due to violations of registrations as a securities broker and transfer agent.
Its stock dropped roughly 1% by Monday's close.
Robinhood warned in its disclosure that a potential action from the SEC could mean a civil complaint and a public court proceeding that could end in a fine, a cease-and-desist order, and other limitations on its crypto activities.
"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," Robinhood's chief legal, compliance, and corporate affairs officer Dan Gallagher said in a blog post.
The SEC has gone after a number of firms that let US customers trade cryptocurrencies as part of a wide-ranging crackdown on the industry.
Last June the agency filed a lawsuit against the largest US cryptocurrency exchange, Coinbase (COIN), alleging it was operating an unregistered exchange by allowing the sale of certain crypto tokens the agency considers to be investment securities — and therefore part of the SEC's jurisdiction.
Currently, Coinbase and its CEO, Brian Armstrong, are fighting those allegations. They have argued the cryptocurrencies sold through its exchange are more like baseball cards than securities.
The regulator made a similar argument in a separate suit against Binance, arguing that the exchange also allowed certain digital currencies to be traded on its platform that should have been registered with the SEC.
Robinhood’s chief legal officer on Monday made the same argument that Coinbase has made, saying that "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."
Robinhood has previously said its crypto business was under SEC investigation, with the trading venue having disclosed that the SEC had sent subpoenas.
What could make this legal threat less severe for Robinhood is that the trading firm earns much less of its total revenue from crypto trading when compared to firms that are more crypto focused, Mizuho analyst Dan Dolev stated in a Monday research note.
In the fourth quarter of 2023, Robinhood earned total net revenue of $471 million, 9.13% of which came from crypto-related transaction fees.
"In our view, concerns regarding the notice are likely overblown," said Dolev, who has a Buy rating on Robinhood’s stock.
Robinhood reports first quarter earnings Wednesday after the market closes.
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.
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