COMMONWEALTH OF KENTUCKY PUBLIC PROTECTION CABINET DEPARTMENT OF FINANCIAL INSTITUTIONS DIVISION OF SECURITIES ADMINISTRATIVE ACTION NO. 2021-AH-00024 DEPARTMENT OF FINANCIAL INSTITUTIONS COMPLAINANT v EMERGENCY ORDER TO CEASE AND DESIST CELSIUS NETWORK LLC RESPONDENT. Comes now the Department of Financial Institutions (hereinafter referenced as the “Department” Pursuant to Kentucky Revised Statute (KRS) 292.470, KRS 252.500, and 808 Kentucky Administrative Regulation (KAR) 10:225, and hereby enters this Emergency Order to Cease and Desist against Celsius Network LLC, (hereinafter referenced as “Celsius”, the “Company”, or *Respondent”). In support thereof, the Department states as follows PARTIES 1, The Commissioner is responsible for administering the provisions of KRS Chapter ‘Scutties Act of Kentucky ("the Act” as well as any applicable rules, regulations and orders etered pursuant to the Act. 2. Celsius Network LLC isa Delaware limited liability company. Respondents have 4 principal office located at 221 River Street 9" Floor, Hoboken, New Jersey, 07030. Celsius [Network LLC has a registered process agent at The Corporation Trust Company, located at Corporation Trust Center, 1209 Orange St, Wilmington, DE 19801 Page tof Lt‘STATEMENT OF FACTS 3. On January 11,2021, the Department became aware tit Celsius was engaging in securities lated activites, Subsequently, the Department conducted ar investigation into Cale, Tearing othe facts and circumstances described herein, 4. On May 26, 2021, the Department searched Celsus's website, \wosiselsiussnsivarks. The website states, among other things, "Meet Celsius: a community of ‘over | millon users that carn up to 17% yield on thei crypt. Get paid new coins every week, “Ear up to 17% APY paid every week", “Get Celsius. Unbank yourself. Earn high. Borrow low", Your erypto ears more with Celsius", “Pu your money to work”, aed “You don't need a bank to make bank” 5. Celsius offers Ear Interest Accounts (“EIAS"), which are interest-bearing cryptocureney accounts that are available on Celsas's website and proprictary smarphone pplication, as pat of its Ear Interest Program, EIAS can be either individual or corporate accounts and ate offered to anyone eighteen (18) years of age or older, except for residents of ‘eran forign jurisdictions, Registering for an EIA requires an investor o mark box to indicate the invesor has read and accepted Celsius's “Terns of Use” and “Privacy Policy”. These ‘documents re available onthe website via hyperink, although the investor sabe to mark the box regardless of whether the hyperlinks ate opened or the documents consents reviewed. 6. Celsius solicits investors to invest in EIAs by depositing certain eligible ‘ryptocurencies into the investors’ accounts at Celsius. Celsius then pools these eryptocurrencies ogether Jo fund its various income-gener ing. activities, including proprietary trading, collateralising Celsius’ borrowings, purchasing securities and digital assets for Celsius’ own ‘account, making loans to institutional and corporate borrowers, and mining eryptacurrency. In Page 2 of 11exchange for investing in an ELA, Celsius promises to credit US. investors with weekly interest payments at an attractive rate and in the same type of eryptocurtency as originally invested. 7. The interest Celsius pays to investors is referred to as “rewards” or a “financing, fee” in the Terms of Use and appear to be the motivating facto for investors to choose an ELA, Celsius offers a variable, “daily periodic rate, which is leulated by dividing the then applicable snnual reward rate by three hundeed and sixty-four days (368); then i is further divided in the hour, minute, and second ofthat day." The rate is further tiered to the nature and amount of cryplocunencies invested, Once calculated, the interests then credited tothe investors’ counts \wookly of the frst business day ofthe week. The rate adjustment appears t be based on the ‘volatile exchange rate of each eryptocurency, which can fluctuate based on cirulation and popularity ofthe tokens. The ates currently advertised by Celsius are substantially above the rates offered by similar short-term investment securities of similar certificates of deposit offered by 8. Celsius’ Terms of Use demonstrate that EIA investors are passive investors. The “Terms of Use grant the Company allright and ttle tothe deposited assets, and the right to pledge, re-pledee, re-hypothecate, sell, end, or otherwise transferor use any amount of such Digital Assets, separately or together with other property, with al atendant rights of ownership, and for any period of time, and without retaining in Celsius’ possession andor contol like amount of Digital Arete or any other monies or aseet, and t0 vee oF invest such Digital Assets in Celsius” fll disereton, A neparate section of the Terms of Use features additional Celsius rights “to assign invest, ‘comming or otherwise dispose of assets and Eligible Digital Assets to counterparties or hold the Eligible Digital Assets with counterparties.” Page Sof 1h9. Celsius’ founder, Alex Mashinsky, has sated “ulsers transfer assets with Celsius, Celsius lends funds to institutions and retums up to 80% of earnings to users."! Additionally, CColsius's Terms of Use describe that EIA investors are “exposed to the possibilty of Celsius ‘becoming unable to repay its obligations in part or in ful, in which cae [the investor's] Digital ‘Assets may be at risk" Celsius wams that account holders should “only use funds that (the investor] can afford to lose” though the Company represents to potential investors that it will “use {its} best commercial and operational efforts to prevent oss.” 10. Ato time before or ater investors agree tothe EIA Terms of Use does Celsius disclose to investors the amount of money devoted to each of Celsius investment activites; the identity, nature, or creditworthiness of the borrowers of material amounts of Celsius’s pooled ‘exyptocurency assets; the terms and duration of Celsius’ loans; the types of securities and digital assets Celius trades; or the profits and losses derived from Celsivs's use of pooled investor ‘eryptocurencis. 11, Celsius also offers an Appl 1 Programming Interface (“API”) that allows ‘eran ens, known as Celsius “APL Partners” to integrate with the Celsius platform, Celsius affords its APL Parner the ability to offer the ELAS to etal investrs ether through a “Segmented Accounts" platform or an “Omnibus Account” Platform. The Celsis “Segmented Accounts” platform allows Al ners to offer EIAs accounts tothe API Partners’ customers through the API Pariners’ own we portal instead of directly from Celsius’s website. Altemativly, the Celsius “Omnibus Account" platform allows API Partners to maintain a direct relationship with Celsius ‘and invest in an EIA forthe benefit ofthe API Partners’ customers, whose eryptocurrences the " Alex Mashinky, How Celia erates prosperity fr rei and nstonl investor ait, Data Driven Investor ‘Mar 7,201), hss un dataset combos ashi qosprefo stan oe alke086054sGh This ace was reposted it he "Medi tab on Celsis's Website Page 4 of LLAPI Parte ageregates for the purpose of investing. Celsius incentivizes the API Partners by paying «fe to Segmented Account partners based ona percentage of rewards payable by Cebus tothe end-user, and also pays fes to Omnibus Parters, in ation othe “rewards” payable. 12. A review ofthe Departments record revesle that neither Celsius nor the ELAS ‘offered on its website ae registered with the Department as required under the Act. Addition, neither Celsius nor these EIAs appear tobe entitled to any exemption ftom registration under the ‘Act The EIAs Celsius offers are not protected by the Securities Investor Protection Corporation (°SIPC%, insured by the Federal Deposit Insurance Corporation (“FDIC”) or insured by the [National Credit Union Administration (°NCUA"), Asa result, Celsius investors are subjet to ad tioml risks compared to investors who maintain assets with most SIPC member broker- dealers banks and savings associations, or credit unions. 3, Respondent claims to curently hold approximately twenty-four bilion dolars’ ($24,000,000,000) worth of account balances. The Department's investigation of Celsss's consumer data found that over a period of three years and four months, 1,607 EIAs were opened among 1,571 Kentucky investors with Celsius and investors pledged $17,594,229.86 wort of digital sets to Celsius. Celsius in tur has pid these investors a total oF $453,353.78 STATUTORY AUTHORITY 14, KRS 292.310(19) defines a “security” elevant par, as: any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collatera-trst certificate, preorganization cerificate or subscription, transferable share, investment contract, life settlement investment, voting-rust certificate, cenifieate of deposit for a security; fractional undivided interest in ol, gas, or other mineral rights; o, in general, any interest o instrument commonly known asa “security Poge Sof if1. 18, KRS 292.320 states, in pertinent par, (1) Tis unlawful for any person, in connection withthe offer, sale, or purchase of any security, directly or indirectly: (4) To employ any device, scheme, or artifice to deft (b) To make any untrue statement of a material factor to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or (6) To engage in any at, practice, or course of business which operates oF would ‘operate asa fraud or deceit upon any person. KRS 292.340 states, Is unlawhl for any person to offeror sell any security inthis state, unless the security is registered under this chapter, or the security or transaction is exempt Under this chapter o the security Isa covered secu, KRS 292.470 states, in pertinent part, ‘Whenever it appears tothe commissioner that any person has engaged or is about to engage in any act or practice constituting a violation of any provision cf this chapter or any rule or order under this chapter, the ‘commissioner may in his other diseretion bring any or all ofthe fllowing remedies: (1) Issue a cease and desist order, with or without a prior heating, appealasle to Franklin Circuit Court, against the person or persons ‘engaged inthe prohibited activities dieting that person or persons to ‘cease and desist from illegal activity. In order to issue an order without prior hearing, the commissioner must find that the delay in issuing a final cesse and desist order will cause harm to the public. FINDINGS OF FACT AND CONCLUSIONS OF LAW. ‘The Department has become aware that the Company is offering securities inthe: form of investment contnets in exchange for the deposit of assets with the Company. These: investment contracts allow passive investors to eam profit in the form of interest on the assets ‘deposited with the Company, and qualify as securities under the Act, Page 6 of 113, Based on the fies set forth above, Respondent offered unregistered securities in Kentucky through a publily available website, in violation ofthe Act. These securities were nat registerel withthe Department as required, and do no qualify fran exemption from registration. 20, These EIAS amount to an investment contract because they are “an investment of ‘money in a common enterprise with profits to come solely fom the efforts of other.” See SC. ¥_W3J.Hostey Co, 328 U.S. 293,301 (1946). 21. Imad tion to selling unregistered securities, Colsus's API Partners program docs not disclose to API Partner customers that Celsius isthe company thatthe customer is investing his or her eryptocurencies with and misleads customers to belive it isthe customer-facing API Partner's offering 22, By eason ofthe foregoing, Respondent has violated the Act and, unless enjoined, will continue to volte the lav. 23, Respondent's management of aes is completely unregulated, and is nt subject to any goverment oversight or approval 24. Respondent isnot curently subject to any disclosure requirements regarding the risks ofinvesing wit the Company, othe potential osses that an investor can suffer afer opening an EIA 25. Accounts opened with Respondent are not insured bythe Federal Deposit Insurance ‘Corporation, or any other government ent 26, This lack of oversight coupled with the extremely volatile nature of the cryptocurencies used to fund Respondents EIAs has resulted in an unregulated market that represen an unprecedented risk to consumers. Page 7of it27, Delay in issuing a fnal cease and desist onde inthis cas would cause direct harm to the public due to Respondents curen and foreseeable conduct. Faure of the Department to ner a cease and desist order in this case could result in extensive financial loses tothe citizens of the Commonwealth, and consumers harmed in this way may have litle to no recourse whatsoever. The emergency nature of his order i eaten to protect the interests ofthe citizens ofthe Commonwealth duet the high volume of assets and volatile nate of eryptocurency Violation of KRS 28, Pursuant fo KRS 292.329, itis unlawful for any person, inconnection tnthe offer cr sale of any security, relly or indie, to engage in any ac, practice, or course of business ‘which operates or would operate as faud or deceit upon any perso orto make any untrue statement of material fact oF to omit to state @ material fact necessiry in order to make the statements made, nthe light ofthe circumstances under which they are made, not misleading. 29, Celsius" API Parnes program deceives consumers by not disclosing to affected Kentucky consumers thatthe offered security is through Celsius and no: the customer facing API Partners in violation of KRS 292.320. wion of KRS 292.340 30. Pursuant to KRS 292.340, it is unlawful for any person to solicitor sll secures in Kentucky without first being registered with the Deparment todo 0 31. Through Celsius's publicly available website and smartphone application, Respondent has solicited securities in Kentucky. 32. TheDepariment’s records show that Respondent has never been epistred with the Departinent and have never sought registration, Page 8 of 1133. The Respondent and the securitis Respondent offzed do not qualify for an exemption from registration. 34, ‘Therefore, Respondent is in violation of KRS 292.340 by soliciting securities in Kentucky without being appropriately registered to do so ORDER In light ofthe foregoing, IT IS HEREBY ORDERED that 1. Respondent, Celsius Network LLC, shall CEASE AND DESIST from soliciting or selling any security in Kentucky unless that security is registered wth the Department pursuant fo KRS 292.340; and 2. Respondent, Celsius Network LLC, shall CEASE AND DESIST from any and all actvily which would otherwise violate the Act. SO ORDERED on this the _23rd_day of September , 2021 _si Charlew A. Vice. CHARLES A. VICE COMMISSIONER Digitally signed by: Charles A. Vice Charles DN: CN = Charles A, Vice email = charles : ves@ky gov C= US O= Dept of A. Vice Figancial Insitutions OU = PPC/OFU Commissioner Date: 2021.09.23 10.0437 05:00 Page 9 of LtNOTICE TO RESPONDENT ‘You are hereby notified that you are entitled to request an emergency hearing. [frequested, ‘an administrative hearing shall be held within ten (10) days pursuant tothe provisions of KRS ‘Chapter 13B.125. Please submit any request for hearing, in writing, o Brandon Adcock, Staff Attomey, Kentucky Department of Financial Institutions, 500 Mero Street 2 SW 19, Frankfort, ‘Kentucky 40601, Alternatively, you may also have the right othe judicial review ofthis Order in ‘Franklin Circuit Court pursuant to KRS 292.470(1), Page 10 of LLCERTIFICATE OF SERVICE eng Teles ry pit copy af fgg mercy ‘Order 1 Cease dad Desist was Seaton tis he 23°F of Seperhase 2021, by cetiied ‘mail retun receipt requested, tothe following: ‘Alex Mashinsky Cetstus Network LLC 221 River Street th Floor Hoboken, NJ 07030 Registered Agent for Service of Process ‘Tae CoRPORATION TRUST COMPANY Corporation Trust Center 1209 Orange Street ‘Wilmington, DE 19801 and by messenger mail or electron delivery to: Brandon Adcock, Staff Attorney Il [DEPARTMENT OF FINANCIAL INSTITUTIONS 500 Mero Street, SW 19 Frankfort, KY 40601 Counsel for Department of Financial Institutions Kentucky Department of Financial Insitutions Name: Yaey Qehansin Tie: Lye. 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