Last week, the U.S. District Court for the District of New Hampshire found that the LBC token was a security, and therefore, subject to federal securities offering laws and regulations. The Court handed a win to the SEC, and LBRY could face civil penalties from the regulator and potential lawsuits from investors.
The decision has far-reaching implications for cryptocurrency issuers and holders by providing important guidance on how courts are likely to apply the Howey test in determining whether digital tokens are securities that must be registered. For example:
The Court disregarded LBRY’s general disclaimer that it was not offering LBC as a security, because its statements to potential investors, which touted the token’s “growth potential,” led investors to understand that LBC was essentially “a speculative value proposition.”
Similarly, LBRY’s retention of large LBC reserves indicated to investors that the LBRY would work to increase the value of the tokens for the mutual benefit of itself and investors, which convinced the Court that the tokens were securities.
Also, the fact that LBC could be used for purchases instead of merely being held as an investment, did not keep the Court from regarding the token as a security subject to registration.
Finally, the Court rejected LBRY’s argument that SEC’s history of pursuing crypto issuers only in connection with an initial coin offering gave LBRY no notice that LBC, which was not issued pursuant to an ICO, that LBC needed to be registered.
The LBRY decision also suggests that courts are more likely to adopt the SEC’s expansive application of the securities laws to cryptocurrencies, as seen in S.E.C. v. Wahi, et al., the former Coinbase employee insider trading case, and S.E.C. v. Ripple Labs. With this decision and the collapse of FTX, there is strong momentum in favor of more SEC regulation. (https://www.sec.gov/news/press-release/2022-127; https://www.sec.gov/litigation/complaints/2020/comp-pr2020-338.pdf).
The attorneys at Sadis & Goldberg LLP have extensive experience with cryptocurrency legal issues, and are available to discuss your concerns. As the LBRY case shows, it is never too early to take steps to avoid the risk of regulatory penalties and civil suits. Likewise, investors who have purchased digital tokens may have valuable claims worth pursuing, which we would be happy to discuss. We often take matters on a contingency basis or alternative fee structure.
The case is SEC v. LBRY, Inc., 21-cv-260-PB (D.N.H.).
