A federal court denied crypto exchange Gemini and Genesis Global Capital’s joint motion to dismiss the SEC’s case regarding their defunct Gemini Earn program, according to a March 13 filing.

The court also denied the companies’ motion to strike the regulator’s requests for permanent injunctive relief and disgorgement.

The court found that the SEC’s complaint “plausibly alleges” that the companies offered and sold securities via Gemini Earn under the Howey and Reves test.

Howey test applied

One prong of the Howey test concerns Gemini Earn’s status as an investment contract. The court determined that the SEC sufficiently alleged common enterprise and horizontal commonality, the latter of which involves tying investor fortunes together through the pooling of assets.

The companies previously argued that Earn’s market rate-based payouts and customers’ ability to exit the agreement at any time ruled out common enterprise and horizontal commonality.

They also argued that the individual treatment of customers and a lack of “skin in the game” among customers did not satisfy that part of the test. However, the court determined that the two firms’ counterarguments were “not persuasive.”

The fact that Gemini Earn agreements stated that loans are intended to act as commercial loans rather than securities does not necessarily make this an economic reality under the test, the court said.

Additionally, the court determined that the SEC had sufficiently proven that Earn investors had expectations of profits via their investments.

The judge denied the companies’ assertion that profits did not directly depend on Genesis’ efforts and its use of borrowed crypto funds because Genesis had advertised the program as an investment with high interest rate yields.

Reves test supports SEC

Under the SEC’s separate Reves test, Genesis failed to challenge the presumption that every note is a security.

According to the filing, Gemini and Genesis’ counterarguments were “in tension with the broad scope of the securities laws” in this area.

This conclusion was based on the motivations of both Genesis and the investors, which were oriented towards investment rather than commercial purposes, with Genesis seeking to generate revenue through lending and investors drawn by the promise of high interest rates.

The wide distribution of the agreements to a broad public segment, coupled with the investors’ reasonable expectations of earning profits from their participation, further supported this classification.

Additionally, the absence of alternative regulatory schemes or other risk-reducing factors solidified the court’s determination that the Gemini Earn agreements, as offered and sold through the Gemini Earn program, constitute securities under the Reves test.