The Trump administration’s about-face on Wall Street enforcement, which began with a retreat from suits against crypto trading giants, has now let “toxic” lenders off the hook on a Depression-era registration requirement for securities dealers.
The Securities and Exchange Commission’s sudden dismissal of several dealer lawsuits is an unprecedented move to abandon the agency’s primary mandate of enforcing securities law enacted by Congress, the SEC’s sole remaining Democratic commissioner, Caroline Crenshaw, said in a statement last month.
“It is astonishing that an agency tasked with enforcing the law has decided the law does not matter,” she said.
The SEC on May 22 dropped a string of cases targeting lenders that obtain a type of debt from penny stock companies that can be converted into stock at a percentage discount from the market price. The lenders can then quickly sell the shares into the public market, often causing share prices to plummet and sending the penny stock companies into a “death spiral,” according to critics who call the loans “toxic.”
Investors will lose key protections without dealer registration enforcement from the SEC, though issuers will still have the option to pursue claims through private litigation, according to securities lawyers and a compliance consultant.
“These so-called toxic lending firms are operating essentially without any oversight now, and I think we’re going to see an increase in the number of companies and individuals providing these types of toxic financings,” said Brenda Hamilton, a securities lawyer and founder of Hamilton & Associates Law Group PA.
Crypto-related cases—including some alleging crypto trading players acted as unregistered dealers—are also falling by the wayside under the Trump administration and Chairman Paul Atkins. The SEC most recently dropped a case against Binance Holdings Ltd. and co-founder Changpeng Zhao, cementing the agency’s turn away from policing digital assets in favor of a regulatory approach spearheaded by a crypto task force.
Tossing the dealer suits encourages other entities to flout registration and other requirements and damages the framework meant to protect investors and facilitate capital markets, Crenshaw said.
“It is a worrisome world when we help participants evade the law because the law is inconvenient for their bottom line,” she said in her statement.
The SEC declined to comment. “The Commission’s decision to seek dismissal of this Litigation does not necessarily reflect the Commission’s position on any other case,” the agency said in its filings to toss the dealers suits.
Enforcement Abandoned
The SEC notched several wins in recent years—including in two cases reaching federal appeals courts—seeking to crack down on “toxic” lenders the agency said were acting as unregistered entities.
“They were the type of financings that have been subject to SEC litigation and enforcement cases that the Commission has prevailed on often at the summary judgment stage,” Hamilton said.
But some investment firms and private funds had raised concerns that the court rulings created confusion about who counts as a securities dealer. The label can bring steep compliance and registration costs, and more oversight from the industry-backed Financial Industry Regulatory Authority.
The SEC has now walked away from at least three of the dealer cases initiated under ex-Chair Gary Gensler—against LG Capital Funding, Tri-Bridge Ventures, and L2 Capital—with several others pending settlement or dismissal.
The SEC’s choice to step away from enforcement despite its record of success litigating the dealer suits signals a policy shift as part of a broader deregulatory push under the Trump administration, securities lawyers said.
Commissioner Mark Uyeda has vocally opposed dealer suits in the past, laying the blame for toxic lending on the issuers and encouraging rulemaking. With Atkins now at the helm after Uyeda closed out his stint as acting chief, the SEC’s stated goal has become enforcing more straightforward instances of fraud, rather than pursuing registration-related actions.
“This is strictly an administrative policy decision not to pursue these securities violators,” said Mark Basile, a senior attorney at Basile Law Firm PC who has represented issuers suing companies for dealer registration violations. “This policy decision doesn’t change the existing case law the courts look at to see if they were engaging in unregistered dealer activity, and it doesn’t stop the public company issuers from pursuing civil claims.”
Filling in Gaps
A retreat from dealer registration cases doesn’t necessarily mean the agency will drop the matter entirely. If the SEC’s crypto turn is any indication, a task force or rulemaking effort could follow.
But the SEC has already sent a strong signal by abandoning enforcement in this area, so the agency could opt to let the halted litigation speak for itself, according to Carlo di Florio, president of compliance firm ACA Group.
“This was more the perception of overreach on the dealer rule, the pushback from the industry, and the courts dismissing it,” he said, referring to an overturned Biden-era rule that would’ve required some hedge funds and other firms to register as dealers in the US Treasuries market. “I don’t think there’s going to be a whole lot more formal action.”
The agency’s mission of policing investor harm means that a case with clear impact on shareholders could prompt Atkins to bring a dealer suit in the future, but existing cases headed for favorable rulings have already been sidelined by the SEC’s new ideological bent.
Fewer companies will be motivated to register as dealers under the new regulatory reality, while others may simply wait to see what the SEC’s updates to its agenda reveal, di Florio said.
“While the SEC may not pursue this conduct, I don’t think it’s going to eliminate all of the private cases,” Hamilton said. “I think we are going to see a move where a lot of this type of activity will be addressed under usury statutes at the state level.”
The cases are SEC v. Long, N.D. Ill., No. 1:23-cv-14260, 5/22/25; SEC v. Tri-Bridge Ventures LLC, D.N.J., No. 3:24-cv-05711, 5/22/25; and SEC v. LG Capital Funding LLC, E.D.N.Y., No. 1:22-cv-03353, 5/22/25.