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  Government Action: BBB reports on known government actions involving business’ marketplace conduct:

  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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