The US Securities and Exchange Commission (SEC) is gearing up to bring a lawsuit against Robinhood's cryptocurrency business, as disclosed in a May 6 announcement. 

According to an 8K disclosure, the regulator has been investigating various aspects of Robinhood's crypto operations, including cryptocurrency listings, custody practices, and platform operations.

Wells notices are a precursor to formal enforcement actions, serving as a heads-up to the subject of an investigation about impending legal proceedings. In Robinhood's case, the notice was delivered on Friday, alerting the company to the SEC's intentions to take action based on alleged violations of the Securities Exchange Act.

Potential Consequences

Robinhood, the popular stock and crypto trading app, acknowledged the potential ramifications of the SEC's action, which could include civil injunctive measures, public administrative proceedings, or cease-and-desist orders. 

Remedies sought by the SEC might involve injunctions, disgorgement of profits, pre-judgment interest, civil penalties, as well as regulatory sanctions such as censure, revocation, or limitations on business activities.

Despite Robinhood's assertion of cooperation with the SEC's investigation, the company expressed disappointment over the issuance of the Wells notice. 

Dan Gallagher, Robinhood’s chief legal and compliance officer, conveyed the firm's frustration, citing years of collaborative efforts to achieve regulatory clarity. 

“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,” Gallagher said in a statement. 

Gallagher emphasized Robinhood's belief that the assets listed on its platform do not qualify as securities.  He reiterated Robonhood’s ability to defend against any allegations brought forth by the SEC.

SEC’s Recent Actions Against Uniswap

This development marks the latest instance of the SEC targeting firms involved in cryptocurrency operations. Just last month, Uniswap disclosed receiving a similar Wells notice, indicating the SEC's heightened scrutiny over crypto-related activities.

Regulatory authorities have challenged Robinhood's crypto offerings in the past, as evidenced by its recent disclosure of subpoenas. To combat this, Robinhood Crypto has chosen not to list certain tokens and has refrained from offering products like lending and staking, which the SEC classified as securities in enforcement actions against other platforms.

Furthermore, Robinhood has attempted to comply with the SEC's directives by seeking registration as a special-purpose broker-dealer. In addition to the ongoing legal battle with the SEC, the company's upcoming earnings announcement reflects the potential impact on both financial performance and regulatory compliance.