The crypto community has legitimately focused on the Ripple case to see how the SEC will deal with the enforcement of claims that cryptocurrency offerings are secure, but lesser-known cases. May be clear first. The SEC proceedings against LBRY are scheduled for September 2022.
LBRY is a protocol that allows anyone to create apps that interact with digital content on the LBRY network. Apps built using this protocol allow authors to upload their work to the host’s LBRY network, price per stream, download it, and offer it for free. .. When the author publishes something in LBRY, an entry is created in the LBRY blockchain. The issuance of securities results from the sale of LBRY credits, as detailed below.
Complaints
In 2021, the Securities and Exchange Commission (“SEC”) filed a complaint against LBRY, Inc. The SEC alleges that it violated the Securities Act of 1933 by offering and selling unregistered securities when LBRY sold “LBRY Credits” to many investors, including “LBRY Credits.” An investor based in the United States without registering with the SEC. In the complaint, the LBRY credit was sold as an investment contract, Howie test. SEC vs WJHoweyCo.. , 328 US 293 (1946). The Howie Tests have shown that “investment contracts” exist when money is invested in a typical company that is reasonably expected to benefit from the efforts of others.Certain digital assets at the time of offer or sale Howie The test depends on certain facts and circumstances. 2019, SEC Framework for “investment contract” analysis of digital assets (“Framework”) Helps individuals determine if a digital asset violates securities law.
Following the framework’s analysis, complaints claim that LBRY credits were generally sold in exchange for donations designed to build, build, and develop LBRY networks. The complaint further claims that selling LBRY credits to institutional investors required investors to wait a year before selling their investment. In addition, the complaint alleges that the LBRY network used the proceeds from the sale of LBRY credits to pay operating costs to grow the LBRY network. As claimed, LBRY received over $ 11 million in US dollars, Bitcoin, and services from buyers who participated in the offer. All these accusations and other accusations are mentioned in the framework analysis.
answer
In its response, LBRY pushed back the agency’s allegations and asserted several affirmative defenses, including affirmative defense and affirmative defense under the accusation of the Article 5 amendment. LBRY treats LBRY differently from other blockchain companies when the SEC is subject to enforcement measures, and treats it unfounded and selectively “on the basis of malicious or malicious intent that hurt LBRY.” He claimed to have proceeded with the investigation in the manner shown.
Petition for judgment on complaint
LBRY admits that it has sued 42 other blockchain creators on suspicion of violating federal securities, and the SEC disputes the defense in its response, stating that it is a “non-starter.” I chanted. The motion for the judgment of the complaint states:[t]The SEC has said that LBRY’s approval undermines LBRY’s claim that it is treated differently than other similarly-positioned digital currency creators, thus inevitably hindering its selective enforcement defenses. Insist. Citing this allegation, the district court dismissed LBRY’s defense of selective enforcement.
Movement to intervene
The LBRY Foundation Inc. (Foundation) has filed a motion for intervention requesting that LBRY Inc. (LBRY) be allowed to intervene in the SEC proceedings. In that move, the Foundation argued that it had radically different interests than LBRY in this case. This stems from their different corporate objectives. Specifically, the Foundation is a non-profit corporation working to promote the growth and use of the LBRY protocol in a “bottom-up, community-driven way,” not selling LBC tokens, but a third party. I explained that it will be given to the person. Parties promoting the goals of the Foundation. LBRY, meanwhile, claimed to be a commercial company that raised money in the form of convertible bonds from venture capital and private investors rather than selling LBC tokens. The Foundation further argued that because it relies on the usefulness of LBC tokens, it may have different litigation strategies that may have different consequences than what LBRY pursues. On the other hand, LBRY can continue to exist without LBC coins, but the Foundation loses its basic purpose when the usefulness of LBC tokens is lost.
The court eventually dismissed the Foundation’s motion for intervention because of the SEC’s response to this motion. One of the SEC’s allegations was that both LBRY and the Foundation sought dismissal because LBC was not an investment contract and therefore not a security. The SEC also said that LBRY and the Foundation have the same interests as the Foundation is LBRY’s “growth” and has supported its mission to leverage LBRY’s resources and personnel to drive the growth and use of the LBRY network. Insisted.
As part of that move, the Foundation also has both the Foundation and LBRY, HowieThe Foundation’s claim is further advanced by challenging the SEC’s “programmatic claim” that the network may be a “company.” Howie..The Foundation interprets the SEC Howie It goes beyond the position of Howey Court. That is, the company that registers the securities by submitting the current business and financial information related to determining the future value of the company is the relevant entity for finding a “common company”. To challenge the SEC’s understanding of “newly expanded” and “corporations” HowieThe Foundation cites several reasons: (1) LBRY is neither a company nor an issuer, (2) LBC does not give holders rights to LBRY’s current and future assets. , (3) The expected value of LBRY as a company does not determine the value of LBC. (4) LBRY registration does not reinforce LBC’s “investment decision” as the value of LBC is not tied to the value of LBRY. (5) LBRY has no direct relationship with LBC via LBC. Holders, such as the issuer of a security, have it with the securities holder. Unfortunately, neither the SEC nor the courts have addressed the Foundation’s general corporate debates in resolving motions for intervention, so the validity of these debates is currently unknown.
Summary judgment and trial
Summary judgment was filed on May 4, 2022. If summary judgment does not resolve the case, it will proceed to trial on September 7, 2022, in front of Judge Paul J. Barbadoro of the US District Court. For the New Hampshire district.
SEC enforcement
There seems to be a perception within the blockchain space that some companies appear to be “running away” in activities that may be considered illegal securities offerings. However, as held by the LBRY court, this selective enforcement defense is “non-starter because LBRY admits that the SEC has sued dozens of other digital currency creators on suspicion of violating securities laws.” is.
As the LBRY Court pointed out, this is a pointless conclusion that an enforcement agency such as the SEC must prosecute all potential fraudsters in order to prosecute just one. Will lead to. Blockchain companies considering issuing tokens should pay attention to this fact before jumping into the token issuance scene.
Impact on Ripple Case
The LBRY court recently dismissed the SEC’s request to extend the hearing date by about a month. This means that the LBRY case will be decided prior to the SEC’s proceeding against Ripple Labs for failing to register for the offer and sale of the cryptocurrency XRP issued by Ripple Labs, unless there is an additional rescheduling. (“Ripple case”). This is important because the court’s decision in LBRY may be cited in Ripple. In fact, the SEC has already attempted to include the LBRY decision as a precedent for Ripple Labs. Ripple case. Specifically, the SEC sought to use the LBRY Court’s ruling on affirmative defense of LBRY’s selective enforcement as a sword against affirmative defense of Ripple Labs’ fair notice. It does not appear to have changed the court’s decision in Ripple, but this is a potential between the two cases as both are awaiting a final ruling and may be decided in close proximity to each other. Ripple.
Another aspect to keep in mind as both cases move forward is whether the SEC is taking an inconsistent position in the LBRY and Ripple cases. Ripple Labs claims that the SEC does so regarding the handling of speeches by former corporate finance director William Hinman. Ripple Labs pointed out this fact in opposition to the SEC’s motion for a partial review of the court’s order on the preparation of notes taken by SEC officials from meetings between the SEC and Ripple Labs, and others. .. In particular, Ripple Labs claimed that the SEC previously claimed that in both Ripple and LBRY cases, Mr. Hinman’s speech merely expressed Mr. Hinman’s “personal view.” Reflected the policy process within the SEC’s corporate finance department, which said it was taking the position of being at its peak. While Ripple Court does not appear to be taking a position on this issue, it further demonstrates the importance of tracking the SEC’s position in both cases. This is because the position of the SEC in some cases, especially its position within each, is inconsistent.
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