Terraform Labs, the firm behind the Mirror Protocol, has received a Subpoena Enforcement Action by the United States Securities and Exchange Commission [SEC]. The co-founder and CEO of the firm, Do Kwon, also received a similar response from the monetary authority.
Mirror Protocol began its journey in 2020, and the platform had a unique use case in its mind. Terraform Labs built the Protocol on the Terra (LUNA) blockchain. The native governance token of the decentralized, community-driven Protocol was termed the MIR token.
Terraform Labs violation of federal securities law
According to the statement by the SEC, there are doubts if the firm has broken federal securities law. Terraform Labs protocol allows users to create and trade assets referred to as “mAssets.” These assets “mirror” the price activity of real-world assets in the U.S., allowing users to gain exposure to them.
“The SEC is investigating whether Terraform Labs, Kwon or others violated the federal securities laws by, among other things, not registering the offer or sale of securities, selling security-based- swaps outside of a national security exchange, acting as an unregistered broker or dealer, or engaging in securities transactions by an unregistered investment company.”
Said the SEC in their statement
The SEC claims that the Mirror Protocol is actually offering trading services to users, acting as a broker, without approval from proper authorities. Since the firm is not registered as a broker, dealer, or exchange, it is not authorized to allow the sale of these “mirrored” assets.
The SEC staff served Terraform Labs and its CEO Kwon with investigative subpoenas, compelling them to produce certain legal documents required for the investigation. However, the firm and its CEO failed to comply, refusing to produce any strong defense or the required documents.
As a result, the monetary authority has now filed a lawsuit against Terraform Labs and Kwon in the U.S. District Court for the Southern District of New York “to show cause why the court should not compel them to produce documents as required by the subpoenas and compel Kwon to appear for testimony.”
The investigation is still ongoing as the SEC hasn’t reached a conclusion.