On July 21, 2022, the SEC filed insiders in federal court for trading a former Coinbase product manager with two others ahead of multiple announcements that certain crypto assets would be available for trading on the platform. I filed a transaction charge. The SEC alleged that the defendants had traded at least 25 crypto assets prior to the listing announcement, of which “at least 9” were investment contracts under the federal securities laws, the commission said. For complaints, Howie An analysis of the nine crypto assets that underlie the SEC’s jurisdiction in this matter. In parallel, the Justice Department indicted the same individual for wire fraud, which is not specifically based on the securities fraud theory.
If the alleged activity proves to be true, indictment against the individual is a given and is clearly the result of internal efforts by Coinbase to detect front-running of the list. Because wire fraud can occur regardless of whether the asset is a security, DOJ wire fraud cases are more likely to succeed if the claims are proven to be true. The problem for the industry stems from the fact that the SEC has filed claims in civil lawsuits against nine token projects that were not parties to the litigation and, at least in some cases, have not been the subject of direct investigation by the SEC. In addition, SEC investment contract claims are subject to jurisdiction. In other words, the SEC Must Based on front-running, take the view that at least one of the tokens is actually a security in the case of insider trading Securities A successful listing under the US Securities Act. This creates a strong incentive for the SEC to pursue litigation toward such findings, allowing the project in question (or the industry as a whole) to effectively refute the SEC’s allegations or go against the SEC’s methods. It gives very little opportunity to object.
Therefore, the number one industry problem is the seeming disregard for due process considerations regarding the SEC’s decisions regarding a particular token or project. Arguably, the parties best positioned to defend against accusations that crypto assets are securities are the projects that launched them and the platforms that list them. These companies were not parties to the lawsuit, and at least some of them were completely unaware of the SEC investigation and were never asked for information or legal positions. Furthermore, five of the nine projects do not appear to be based in the United States, so the SEC may not have jurisdiction as an entity, and therefore cannot intervene or become involved in the U.S. courts on the matter. There may be little incentive to do so. Therefore, this lawsuit could put one platform, nine entities, and thus an industry in a bind, and subject them to adverse legal decisions that are irrefutable.
The fact that this is an industry issue is indicated by industry issue number 2. That’s the relatively common nature of the crypto assets the SEC named in its complaint. Striking out the names of the tokens and their issuers, and just reading the project description, the nine tokens sound like representatives of classes or categories of sub-assets within the digital asset ecosystem. Native Platform Tokens; Governance Tokens, etc. The projects also appear to represent different sectors of the digital asset industry. Decentralized liquidity pools and automated market makers. A project managed by a decentralized autonomous organization (DAO). As a result, the SEC uses a variety of factors (some listed in the 2019 FinHub Guidance, others not) to support that factor, so this complaint is not a digital one. It portends problems for the entire property industry. Howie Analysis common to many projects across industries.
As a specific example, the SEC Howie An analysis of nine projects reveals the SEC’s view on some common features of DeFi.
governance token – The three crypto-assets identified by the Commission may be characterized as governance tokens. Governance tokens are intended to be a means by which projects can achieve true decentralization, but the SEC’s complaint is that if the core development team holds governance tokens, the level of Regardless, suggests not to be persuaded by such efforts. So you can vote as well as withdraw financial benefits from those tokens. As a result, should the SEC prevail, governance tokens will be characterized by the SEC as security where core development teams (either as individuals or as members of unaffiliated development companies or labs) hold more than a minimum number of tokens. There is a possibility that it will be .
Staking, Liquidity Pool Tokens, Yield Farming – Decentralized platforms often feature native tokens that enable trading of decentralized liquidity pools and automated market making, and require a certain number of stakes in these tokens to access the functionality of the platform. often allow (or require) These features of native tokens are commonly thought to represent their usefulness and enable decentralization. However, the SEC relies on these activities and functions across a number of identified cryptoassets to establish a reasonable expectation of common corporate existence and interests ( Howie test). As a result, this complaint amounts to the SEC’s allegation that these common features of DeFi protocols irrevocably taint these tokens as securities.
Offshore DAO structure – The SEC complaint summarizes and repeats the organizational structure of a combination of a U.S.-based company that provides software development services, an offshore foundation, and an offshore unincorporated DAO as a single entity. I’m explaining. The SEC has dismantled corporate structures without regard to applicable company law provisions, ignored jurisdictional considerations, and used the platform and protocols to categorize commercial corporations and LLCs, foundations and other non-equity entities, and unincorporated corporations. Mix it up with entities and paint with a broad brush. While there are no details about the arrangements between these entities, the complaint alleges that the SEC may be skeptical of separating the offshore structure from the U.S. development team, and makes assumptions and allegations about the relationships of the corporate entities without investigation. of the underlying corporate structure and relationships.
Secondary market trading – While the SEC has long stated that the existence of a secondary market for tokens is a factor to consider in determining whether a reasonable expectation of profit exists, the SEC’s complaints are based on this factor. The complaint focuses on an unusual degree. Statements highlighting that purchasers can resell their tokens on the secondary market are “a definite incentive for investors and essential to the market,” the complaint said. Declared, much of the discussion about the nine crypto assets is focused on this factor.As a result, the SEC almost de facto Discovery of investment contracts when there is a secondary market transaction of assets.
of the committee Howie Analysis of this complaint indicates a significant change from previous behavior. In previous cases, such as those involving Kik, Telegram, and Ripple, the entities were subject to SEC investigation, had the opportunity to provide evidence in their own defense, and had written legal proceedings before litigation was filed. had the ability to submit legal justifications (called Wells Submission) presents its claim to the asset’s security status. Here the nine analyzes are formulaic. The Commission believes that token issuers should determine (1) the value of their tokens, (2) the ability of purchasers to engage in secondary trading of their tokens, and (3) both at the time of their sale to the public and on an ongoing basis. , the expertise of the token issuer. Evidence from the company was not included, and in at least some cases, nothing was sought or provided the company with the ability to assert its own position.
In short, the outcome of the SEC complaint could have implications beyond the defendants in the lawsuit, the nine cryptocurrency issuers identified in the complaint, and the nine token-listing platforms. Many other DeFi protocols and participants in the larger crypto ecosystem engage in activities similar to the projects identified in the complaint. Many may never have been involved with the SEC, or even if they were, they may not believe that the SEC has reached the level of what they would argue in court over their assets. To the extent that the SEC succeeds in ruling in favor of certifying these nine crypto-assets as securities, such certifying may be used to support additional enforcement actions against the larger and more established players in the industry. may be used for
Civil insider trading cases are often put on hold pending the outcome of criminal cases, giving the industry time to respond. However, criminal wire fraud cases tend to have the effect of focusing the attention of individual defendants, and the SEC uses the criminal cases to secure defendants’ consent to the language of the SEC’s civil settlements. There are real risks. Claims that could be ratified by courts and used as a stick against the industry.