CHC+

Judge says XRP is not itself a security.

Holds:

XRP sold by Ripple Labs, Inc. (“Ripple”) to certain sophisticated and institutional buyers pursuant to written contracts were offered and sold as unregistered investment contract securities because they satisfied the Howey test.

The Court rejected Defendants argument that they lacked “fair notice” that the Institutional Sales were unlawful, finding Howey and its progeny provide sufficiently clear guidance.

XRP sold by Ripple to general public on exchanges were not securities because there was no reasonable expectation of profits from the efforts of Ripple, as buyers were not even aware their money went to Ripple.

XRP distributed by Ripple to employees as compensation for services, or distributed to third-parties in conjunction with Ripple’s Xpring initiative, were not securities because Ripple never received money in exchange for these distributions, and thus there was no “investment of money” in Ripple, as required by Howey.

Because the Court’s decision stands in stark contrast to the SEC Chair’s and some Congressional Democrat’s position that existing securities laws apply almost universally to crypto assets sold on exchanges, the decision may force Congress to act to clarify and install consumer protections in the crypto market.

The SEC was unable to point to any specific evidence that defendants were commingling or dissipating Binance.US’s customer assets.

And While Judge Jackson was careful not to address merits of claims at this phase of the litigation, she raised several questions foreshadowing what are likely to be key issues throughout the case: (1) whether BNB is still a security today, even after the initial offering (2) whether BNB can be an investment contract when there is no actual contract, and (3) whether Judge Jackson, rather than Congress or agency rulemaking, is the proper vehicle for determining whether a crypto asset is or is not a security, and when.

The SEC charged Coinbase with operating as an unregistered national securities exchange, broker, and clearing agency.

Specifically, the SEC alleges Coinbase engaged in exchange, broker, and clearing agency activities involving the following “Crypto Asset Securities” which constitute investment contracts: SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO. According to the SEC, the Crypto Asset Securities represented investment contracts at all times—i.e., from when the tokens were acquired by initial investors to when they were bought and sold on the secondary market.

The SEC also claims Coinbase offered and sold unregistered securities through its “Staking Program,” which it claims is an investment contract.

The Third Circuit ruled it will retain jurisdiction over the case and ordered the SEC to update the Court by October 11, 2023 on the status of its decision to respond to Coinbase’s petition for rulemaking.

Coinbase had petitioned the Court for a writ of mandamus instructing the SEC to act on its petition for rulemaking regarding registration for digital assets and digital asset intermediaries. Alternatively, Coinbase asked the Court to retain jurisdiction over the matter to monitor the SEC’s progress. Coinbase argued the SEC’s refusal to formally respond to the rulemaking petition—despite having already made up its mind internally to deny it—is nothing more than an attempt to evade judicial review and thus unreasonable under the APA.

The SEC countered that mandamus is an extraordinary remedy not warranted here because ten months is not an unreasonable time frame based on a string of cases affording agencies five years or more to review petitions, the complexity of issues raised in the petition, and characterizing Coinbase’s claim that it has already made up its mind as “baseless.”

Summary of Arguments in table format.

The SEC charged Bittrex, and its former CEO, with operating as an unregistered national securities exchange, broker-dealer, and clearing agency.

The SEC alleged Bittrex facilitated trading in at least the following “crypto asset securities:” OMG, DASH, ALGO, TKN, NGC, IHT, POWR, MANA.

On August 10, 2023, the SEC settled with Bittrex and its former CEO. Bittrex will pay $24 million to settle the charges.

The SEC charged defendants with offering and selling unregistered investment contract securities where they operated a scheme offering investors mining tools and software that were controlled remotely by defendants and that purportedly mined a GREEN crypto token on a “Green Blockchain.”

The Court also charged defendants with violating antifraud provisions for making misleading statements in connection with offering the crypto asset mining tools—namely, for claiming the tools mined GREEN tokens on a Green Blockchain, which did not in fact exist.

Grayscale is challenging the SEC’s decision to deny a proposal to convert the Grayscale Bitcoin Trust into a spot bitcoin ETP. The SEC rejected the Proposal, finding it failed to show it was sufficiently designed to protect against fraud and manipulation.

The Court denied a motion to dismiss a suit alleging Dapper Labs sold unregistered securities, finding plaintiffs adequately pled the company offered Top Shot Moments NFTs as investment contract securities.

Key to the Court’s conclusion were allegations that Moments’ value was dependent on the “essential efforts” of Dapper Labs to control and manage the private Flow Blockchain and Marketplace. Specifically, because Dapper Labs restricted purchasers from using Moments outside of the Flow Blockchain and from selling Moments outside of the company’s Marketplace, Moments would be valueless without Dapper Labs’ efforts to maintain Flow and cultivate the Marketplace.

The SEC charged Terraform Labs and its CEO, Do Kwon, (together, the “Defendants”) with offering and selling unregistered crypto asset securities (Luna, Wrapped Luna, UST, and MIR) and unregistered security-swaps (mAssets). The SEC also charged Defendants with violating antifraud provisions under securities laws by making misleading statements related to the sale of the crypto asset securities.

Paul Pierce agreed to pay over $1.4 million in penalties, disgorgement, and interest to settle SEC charges that he promoted EMAX tokens—alleged to be investment contracts—on social media without disclosing the compensation he received and making false and misleading statements in relation to the promotion.

The SEC charged Kraken with offering-and-selling unregistered securities to the general public by offering a staking-as-a-service program whereby investors transferred crypto assets to Kraken, who then pooled the assets, staked a percentage, and then paid customers a percentage of the rewards earned (“Kraken Staking Program”).

In an accompanying press release, the SEC announced Kraken agreed to stop offering the Kraken Staking Program immediately and pay $30 million in disgorgement, prejudgment interest, and civil penalties. Kraken neither accepted nor denied the allegations in the Complaint as true.

Court grants motion to dismiss federal claims with prejudice in class action suit against Coinbase and CEO Brian Armstrong. Plaintiffs had sued Coinbase for facilitating the sale of unregistered securities, operating as an unregistered securities exchange, and selling contracts prohibited under federal securities laws by selling certain crypto assets.

SEC charges Genesis and Gemini with offering and selling unregistered securities through its Gemini Earn program, arguing the underlying agreement constituted a security under the Securities Act because (a) it was a note under the Reves test and (2) an investment contract under the Howey test.

Nexo agreed to pay penalties to settle charges the company offered and sold unregistered securities through their “Earned Interest Product” (“EIP”) whereby Nexo payed interest to customers who deposited funds in the EIP. SEC alleged the EIP constituted “notes” under Reves and “investment contracts” under Howey.

SEC charges Samuel Bankman-Fried (“SBF”) with violating anti-fraud provisions under federal securities laws for making misleading statement about FTX’s risk management, financial soundness, and customer protections to FTX equity investors.

The Court granted the SEC’s motion for summary judgment finding LBRY offered the LBC token as an unregistered security because: (1) LBC was an investment contract based on LBRY’s statements to potential purchasers and LBRY’s business model of holding onto a large percentage of LBC tokens; and (2) LBRY was given fair notice that it needed to register the LBC tokens based on a straightforward application of Howey and its progeny.

Kim Kardashian agrees to pay $1.26 million in penalties, disgorgement, and interest to settle SEC charges of promoting a security without disclosing the compensation she received in exchange.

Supreme Court adopts the “family resemblance” test for determining whether an instrument falls under the definition of “note” for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934.

Under this test, a note is presumed a security unless it bears a strong resemblance to a judicially crafted list of instruments that are not securities, and by examining the following four factors: (1) The motivation of the buyers and sellers; (2) The plan of distribution; (3) Reasonable expectations of the investing public; (4) Risk reducing factors, like another regulatory regime.

Supreme Court adopts the test now used by courts to determine whether an investment qualifies as an “investment contract” under the Securities Act of 1933’s definition of a “security.” Drawing from state law interpretations of “investment contract” and Congressional intent in enacting federal securities laws, the Court held: “an investment contract means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”