Crypto Giants Lido and Rocket Pool Face SEC Scrutiny Over Staking Programs

B. Liquid Staking Pool Providers: Lido and Rocket Pool

238. Lido and Rocket Pool have each created and maintained respective staking programs, designed to capture the staking rewards described above.

239. Lido and Rocket Pool each call their program a “liquid staking” program because— as described below—investors are issued a tradable token in exchange for depositing funds into the program. This token represents the investor’s interest in the program. The token issued in exchange is referred to as a “liquid staking token” or “LST” and the LST can be traded on the secondary market.

240. In Lido, the LST is called stETH; in Rocket Pool, the LST is called rETH.

241. The amount of LST an investor receives is proportional to the amount of ETH they deposit.

242. These staking programs allow investors to both obtain the rewards of staking and also purportedly retain the ability to redeem the value of their investment at any time.

i. The Lido Staking Program Is An Investment Contract.

243. Lido launched its liquid staking platform in December 2020.

244. To participate, investors deposit ETH with Lido.

245. In return, Lido issues the investor another crypto asset, “stETH,” representing the investor’s pro rata interest in Lido’s staking program, including the investor’s original deposit of ETH plus any accumulated returns.

246. Lido then uses investors’ deposited ETH in the Ethereum consensus mechanism to earn staking rewards—the financial returns for investors.

247. Specifically, Lido pools the ETH deposited by investors into a Lido smart contract, which initiates the creation of a validator by depositing a 32 ETH bundle to the Ethereum validator deposit contract.

248. As of June 25, 2024, over 28% of all staked ETH on Ethereum is staked in Lido’s staking program.

249. Lido takes, as a fee, 10% of the staking rewards earned.

250. The remaining rewards are accrued, pro rata, by stETH token holders.

251. Lido markets its staking program as an investment opportunity.

252. Lido also leads investors to reasonably expect that investors’ profits will come from Lido’s efforts.

253. According to Lido’s website, from December 2020 to February 2024, Lido’s staking program returned an annualized percentage gain of 3% to 9%.

254. In a blog post dated December 28, 2020, Lido stated: “Lido allows users to stake any amount of ETH – without the need to maintain complex infrastructure.”

255. From at least June 2021 to June 2024, in a “Help” article on its website, Lido stated that staking “requires expert knowledge and complex and costly infrastructure” and that through Lido “users can eliminate these inconveniences.”

256. Lido claimed in an October 2020 document posted to its website that it is “more profitable” than other staking pool providers because of its fee model and the quality of its node operators.

257. From at least February 2023 to June 2024, another “Help” article on Lido’s website claims to allocate investors’ staked ETH across multiple, high-quality validator node operators (that is, participants in the Ethereum network consensus mechanism), minimizing the risks associated with staking ETH.

258. In the same Help article, Lido states that it elects “professional and reputable node operators” and that the penalty and slashing risks are reduced “given the quality of the Lido validator set and its proven track record.”

259. In short, Lido purportedly offers investors a “simplified participation in staking”— deploying its resources and expertise to achieve staking rewards that individual investors typically would not be able to achieve on their own.

260. The holder of any stETH—whether issued directly from Lido or purchased in the secondary market—has the right to deliver the stETH to Lido to get back the pro-rata staked ETH plus accrued rewards.

261. Lido treats all investors’ deposited ETH as fungible. It does not purport to segregate investor funds.

262. In light of the above, Lido offered and sold its staking program as an investment contract.

ii. The Rocket Pool Staking Program Is An Investment Contract

263. Rocket Pool launched its platform in October 2021.

264. To participate, investors deposit ETH with Rocket Pool.

265. In return, Rocket Pool issues another crypto asset, “rETH,” representing the investor’s pro rata interest in Rocket Pool’s staking program, including the investor’s original deposit of ETH plus any accumulated returns.

266. Rocket Pool then uses investors’ deposited ETH in the Ethereum consensus mechanism to earn staking rewards—the financial returns for investors.

267. Specifically, Rocket Pool pools the ETH deposited by investors into a Rocket Pool smart contract, which initiates the creation of a validator by depositing a 32-ETH bundle to the Ethereum validator deposit contract.

268. Rocket Pool takes a 0.05% fee of the staking rewards it earns.

269. The remaining staking rewards accrue, pro-rata, to investors.

270. Rocket Pool also markets its staking program as an investment opportunity.

271. According to Rocket Pool’s website, rETH “accrues value over time.”

272. Rocket Pool also leads investors to reasonably expect that investors’ profits will come from the efforts of Rocket Pool.

273. As of June 2024, Rocket Pool advertised on its website an annual percentage return of approximately 3.11%.

274. In an FAQ available on its website, Rocket Pool notes that its staking service makes staking available to investors who might not otherwise have the technical expertise necessary to interact with smart contracts or keep a node running 24/7.

275. Indeed, according to Rocket Pool’s FAQ, its program “removes several high barriers to entry that exist with Proof of Stake on Ethereum.”

276. In a January 22, 2021, Medium Post, Rocket Pool stated that its program was “an easy and permissionless way to engage in staking without needing to run any staking infrastructure or even have 32 ETH.”

277. The Rocket Pool FAQ states that it will “allow anyone to earn rewards on deposits as small as 0.01 ETH.”

278. On its website, Rocket Pool also attempts to differentiate itself from other staking pool providers, claiming that “Rocket Pool is the only staking platform with a perfect score on ethereum.org.”

279. According to Rocket Pool’s website, its protocol is highly secure and its “smart contracts have been extensively audited, multiple times, by some of the best auditors in the Ethereum ecosystem.”

280. Rocket Pool also touts other reasons for investors to stake their ETH with Rocket Pool.

281. In the January 2021 Medium post, Rocket Pool notes that the value of rETH is “protected against node slashing and downtime by several built in insurance mechanisms.”

282. Specifically, Rocket Pool requires individuals that run Rocket Pool validator nodes to put up collateral to protect against losses that may result from penalties and slashing.

283. Rocket Pool’s website states that “every rETH token is exactly the same, you will automatically receive the benefits of staking just by holding the token!” (Emphasis in original.)

284. In light of the above, Rocket Pool offered and sold its staking program as an investment contract.

285. Neither Lido nor Rocket Pool have ever filed registration statements with the SEC for the offer and sale of their respective staking program investment contracts.