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  DFPI vs Donut Inc
  

  Since at least 2020, Donut offered and sold unqualified, nonexempt securities in issuer transactions in California by operating an online platform offering interest-bearing accounts in which a consumer deposited fiat funds (U.S. dollars) and Donut promised a fixed annual percentage interest yield (APY). Donut offered these interest-bearing accounts under names including Save, Build and Grow, each promising an incrementally higher APY. Donut represented in marketing that the consumers’ deposited funds were converted to crypto assets, then lent out to third-party entities for investment purposes, stating: “[Donut] convert[s] your USD to digital dollars (USDC stablecoins) and puts those dollars to work in lending markets seeking to provide you a protected base APY of 5%. These funds are lent to a diversified pool of trusted institutional borrowers and protected by overcollateralization.”

  Donut advertised one of its interest-bearing products, the Save account, as a “secure savings strategy with a fixed based APY of 5% best for savings, college funds, and debt paydown.” Portraying the interest-bearing accounts as “conservative,” Donut promised that the consumers’ funds were “always” protected by overcollateralization of 125% of the consumers’ principal, and that if the value of the collateral fell, third-party borrowers would be “margin called and required to top up or repay part of their loan.” Donut reassured consumers that “this [collateral] protects your principal and interest earned in case of borrower default or when crypto prices crash.”

  Donut promoted its technology as superior to traditional investing methods and promised that Donut “has the power to generate returns up to 20x the national average” and that it had “built the easiest, safest way for you to earn.”

  California consumers investing with Donut were not required to have any business expertise or experience or to contribute any management efforts in order to benefit from the high interest rate yields of Donut’s products. Donut’s Terms of Service specified that consumer funds were deposited with Donut via Automated Clearing House (ACH) transfers and that the accounts were charged a “2% annual fee.” As an additional marketing incentive, Donut offered a “referral program,” described as “[an] additional interest rate incentive for a given time period for each friend that signs up using your invitation, connects a bank account, and completes a single transfer.” 

  Donut’s interest-bearing products pooled consumers’ assets together and put them at risk with the stated purpose of generating passive returns for the consumers. Consumers did not engage in substantive platform-related activities beyond depositing their fiat assets with Donut; they depended on Donut’s significant business efforts to receive their expected interest payments. Although these products functioned similarly to banks or pooled investment vehicles, Donut was and is not registered in this capacity with any relevant authority and was not protected by organizations such as the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. As a result, the consumers’ expectation and ability to receive a profit in the form of interest payments through the fixed-interest yield products were dependent on the success of Donut’s and other thirdparties’ business efforts. California consumers deposited money into the Donut interest-bearing accounts seeking to earn the promised APY interest growth. At least one California consumer (Consumer A) reported that by November 2022, they had invested over $200,000.00 into the Save product with a promised annual percentage yield of six percent. Consumer A relied on Donut’s representations regarding “over-collateralization” in believing that there was a low risk of losing their funds. 

  On November 17, 2022, Donut abruptly ceased all consumer withdrawals from their accounts. Donut subsequently posted updates stating that Donut had deposited most of the consumers’ assets with a third-party company that declared bankruptcy in January 2023. Donut continues to prohibit consumers from withdrawing their funds.  As of March 2023, the Donut website (www.donut.app) states, “We are taking off our apron for now[.] The Donut app and its services have been discontinued.” 

  Based on the foregoing findings, the Commissioner finds and is of the opinion that Donut’s interest bearing account products are securities, in the form of investment contracts, as defined in Corporations Code section 25019, and subject to qualification under the Corporate Securities Law of 1968 (CSL) (Cal. Corp. Code §§ 25000-25707). These unqualified, nonexempt securities were offered or sold in this state in issuer transactions in violation of Corporations Code section 25110. 

  Further, any person who with knowledge directly or indirectly controls and induces another person to violate any provision of the CSL, or knowingly provides substantial assistance to another person to violate the CSL, is deemed to be in violation of that provision to the same extent as the other person. Cal. Corp. Code § 25403(a)&(b). Neel Popat, as the Chief Executive Officer of Donut, is a person who with knowledge directly or indirectly controlled and induced Donut to violate Corporations Code section 25110. Further, Neel Popat knowingly provided substantial assistance to Donut in violating Corporations Code section 25110, as a person who promoted the sale of the interest-bearing investment contracts to the general public. 

  Under Corporations Code section 25532, Donut, Inc., doing business in California as Donut App, Inc. and Neel Popat, Chief Executive Officer of Donut Inc., are hereby ordered to desist and refrain from the further offer and sale of securities in the State of California, including but not limited to the interest-bearing accounts known as Save, Build, and Grow, or any other similar interestbearing asset account that functions as a security, unless such offer or sale has been qualified under Corporations Code sections 25111, 25112, or 25113, or unless such security or transaction is exempted or not subject to qualification. 

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