What Is a Wells Notice and What Does It Mean?

By Jason Nelson

As the crypto industry continues to seek regulatory clarity from regulators in Washington, D.C., regulators are nonetheless taking targeted action against a variety of players in the space.

The U.S. Securities and Exchange Commission in particular has been busier than ever, investigating and fining crypto firms that it asserts are selling unregistered securities.

On March 22, 2023, the U.S.-based cryptocurrency exchange Coinbase received a Wells notice, which is a prelude to the filing of charges by the SEC against the publicly traded company.

Wells notices are named after John A. Wells, who served as SEC advisory committee chair in 1972. They are issued by the agency to alert a company. In the case of Coinbase, the SEC is planning to bring an enforcement action against them for alleged violations of securities laws.

Other agencies that may issue Wells notices include the Financial Industry Regulatory Authority (FINRA) and Commodity Futures Trading Commission (CFTC). The National Association of Securities Dealers (NASD), an industry self-regulating body, also issues Wells notices.

According to the SEC, a Wells notice is not a formal allegation or a finding of wrongdoing but comes at the end of an investigation and as a preliminary step before the SEC moves forward with a civil enforcement action or proceeding against the recipient. They are typically sent by agency staff, who do not have the authority to initiate legal proceedings, and a regulator could move forward with charges without a Wells notice being issued.

The recipient has up to 30 days to respond to the Wells notice. The company’s legal counsel can request to see the evidence the SEC has gathered on their claim via a “Wells submission,” and attempt to persuade the SEC to drop the action.

The company or person can also enter into settlement talks with the agency at the agency’s discretion.

Wells notices are not announced publicly by regulators, and not all companies that receive them disclose that fact.

If the SEC does decide to proceed with charges, the agency will file a formal complaint and may issue a press release notifying the public of the action.

Coinbase is just the most recent cryptocurrency business to be sent a Wells notice. Last month, stablecoin issuer Paxos halted the minting of Binance USD stablecoins after receiving one. 

Days earlier, fellow U.S.-based cryptocurrency exchange Kraken settled a $30 million lawsuit with the SEC regarding its staking rewards program, which regulators called unregistered securities; the exchange shut down the program after paying penalties.

There was no public disclosure of a Wells notice preceding the settlement, but Kraken has previously entered a  $362 million settlement with the Office of Foreign Assets Control (OFAC) over alleged violations of U.S. sanctions against Iran.

While many in the industry have decried what it calls the SEC’s regulation by enforcement tactics, others like Massachusetts Senator Elizabeth Warren applaud the agency’s clampdown, saying, “the crypto industry is scared of a strong SEC.”

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