After delivering a subpoena to Terraform Labs CEO Do Kwon at the Mainnet conference in New York City this fall, the U.S. Securities and Exchange Commission filed an action on Nov. 12 to compel documents and testimony from the company and its founder.

Fast facts

  • Terraform Labs is a Singapore-based crypto firm that operates the Terra blockchain and the stablecoin Terra. But the project at issue is the Mirror protocol, launched in 2020, a decentralized finance platform that allows investors to create and trade crypto tokens that mirror the price of U.S. securities, such as stocks.
  • The SEC’s subpoena enforcement action seeks an order from the U.S. District Court for the Southern District of New York to direct Terraform Labs and its South Korea-based co-founder and CEO, Do Kwon, to comply with investigative subpoenas and produce documents and testimony. The SEC is investigating potential violations of securities laws including operating as an unregistered broker or dealer and selling securities outside of a national security exchange.
  • In late October, Do Kwon sued the SEC, alleging that he was improperly served at the Messari Mainnet Conference, held in New York City Sept. 20-22. His complaint alleges, “The subpoenas were served on Mr. Kwon in public: Mr. Kwon was approached by the process server as he exited an escalator at the Mainnet summit while on his way to make a scheduled presentation that was not about the Mirror Protocol.” The complaint continues, “The SEC’s conduct here violated its rules requiring it to keep formal orders of investigation confidential.”
  • That’s hogwash, said Todd Cipperman, managing principal of Cipperman Compliance Services, in an interview with Forkast.News. Cipperman discussed the SEC’s power generally as he cannot comment specifically about the Terraform case. He said the SEC has no requirement to keep investigations confidential and furthermore, it has broad authority for civil investigations. 
  • Cipperman said Terraform and Kwon have almost no recourse but to comply with the SEC. “People get incensed the SEC is investigating them, but the SEC pretty much has sole discretion if they think there’s been a violation,” he said. “Generally speaking it’s really tough to wriggle out of this.” Even if Terraform and Kwon didn’t comply, the SEC could get a default judgement, which would make fundraising and doing business in the U.S. extremely difficult.
  • “The SEC has certainly rattled its sabers against non-U.S. companies in the crypto space,” said Cipperman, adding that the violations the SEC is alleging against Terraform are not unusual.