Last week’s wild ride in the crypto-verse started, of all places, in New Hampshire. On Monday, a federal judge ruled that LBRY Credits (“LBC”) are securities, and thus LBRY violated Section 5 of the Securities Act of 1933 by selling LBC.[1] LBRY responded with a tweet describing the ruling as “extraordinarily dangerous precedent that makes every cryptocurrency in the U.S. a security, including ethereum.”[2]
SEC v. LBRY, Inc. treads new ground in one sense. It is the first time a federal court has found a token sold outside of an Initial Coin Offering (“ICO”) to be a security. The real question is whether the ruling really means every cryptocurrency is a security. A close reading suggests it does not.
The procedural posture of the case was that the parties filed cross-motions for summary judgment. LBRY did not challenge the SEC’s assertion that it offered and sold LBC in interstate commerce without a registration statement or contend that its prior offerings met any of the exemptions to the registration requirements. Accordingly, the sole issue before the court was whether LBRY’s sale of LBC met the test for an “investment contract” and thus a security under the venerable Howey test.
In opposing the SEC’s motion for summary judgment, LBRY elected to concede two of the three prongs of the Howey test – that (1) LBC purchasers “invested money” in (2) a “common enterprise.” That left the parties to fight over whether individuals purchased LBC with (3) an “expectation of profit” derived from “the entrepreneurial or managerial efforts” of LBRY. The New Hampshire federal court granted the SEC’s motion for summary judgment and denied LBRY’s motion.
What You Say Can and Will Be Used Against You
SEC v. LBRY is a cautionary tale about the importance of disciplined communication statements in light of the way statements can be used against you in litigation. And here, the SEC used many of LBRY’s and its officers’…
