The Securities and Exchange Commission (SEC) has issued a Wells notice to Coinbase, warning the company that it has identified potential violations of US securities law. 

Coinbase shares plunged over 8% after the news broke on Wednesday. The shares have fallen nearly 58% in the past year. The company’s shares have fallen by over 77% since its listing in April 2021. 

The potential civil action may seek injunctive relief, disgorgement, and civil penalties. The SEC has ramped up its enforcement of the crypto industry, bearing down on companies and projects that the regulator alleges were hawking unregistered securities. 

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The investigation into Coinbase is described as “cursory,” and the Wells notice provides relatively little information about potential violations. Coinbase executives have pushed back against perceived overreach by the SEC, which has moved aggressively against the crypto industry since the collapse of FTX.

The SEC has not provided specific allegations but the notice indicates that it found potential violations of securities laws in certain aspects of the company’s exchange, staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet. 

The allegations have not been made public, but Coinbase has stated that it intends to fight the SEC’s legal action if necessary and welcomes a legal process to provide clarity on the regulations surrounding digital assets.

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A Wells notice is a formal notification from the SEC that it intends to bring an enforcement action against a person or company. It is considered one of the final steps before a formal action against an individual or a company. It provides a brief summary of the alleged violation, along with the legal basis for the charges.

The notice offers the recipient an opportunity to rebut the SEC’s allegations, prepare a defense or potentially settle the matter before formal charges are filed. 

“Although we don’t take this development lightly, we are very confident in the way we run our business, the same business we presented to the SEC in order for us to become a public company in 2021,” said Paul Grewal, Chief Legal Officer Coinbase via a blog post.

Grewal also added that Coinbase is looking for more regulatory clarity. “Tell us the rules and we will follow them. Give us an actual path to register, and we will register the parts of our business that need registering,” he said.