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Last week\u2019s wild ride in the crypto-verse started, of all places, in New Hampshire. On Monday, a federal judge ruled that LBRY Credits (\u201cLBC\u201d) are securities, and thus LBRY violated Section 5 of the Securities Act of 1933 by selling LBC.[1]<\/sup><\/a> LBRY responded with a tweet describing the ruling as \u201cextraordinarily dangerous precedent that makes every cryptocurrency in the U.S. a security, including ethereum.\u201d[2]<\/sup><\/a><\/p>\n SEC v. LBRY, Inc.<\/em> 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 (\u201cICO\u201d) 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.<\/p>\n The procedural posture of the case was that the parties filed cross-motions for summary judgment. LBRY did not challenge the SEC\u2019s 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\u2019s sale of LBC met the test for an \u201cinvestment contract\u201d and thus a security under the venerable Howey <\/em>test.<\/p>\n In opposing the SEC\u2019s motion for summary judgment, LBRY elected to concede two of the three prongs of the Howey <\/em>test \u2013 that (1) LBC purchasers \u201cinvested money\u201d in (2) a \u201ccommon enterprise.\u201d That left the parties to fight over whether individuals purchased LBC with (3) an \u201cexpectation of profit\u201d derived from \u201cthe entrepreneurial or managerial efforts\u201d of LBRY. The New Hampshire federal court granted the SEC\u2019s motion for summary judgment and denied LBRY\u2019s motion.<\/p>\n What You Say Can and Will Be Used Against You<\/strong><\/p>\n SEC v. LBRY<\/em> 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\u2019s and its officers\u2019 external and internal statements to play into its arguments, and the court agreed. A few examples are illustrative.<\/p>\n The court found that \u201c[t]hese statements are representative of LBRY\u2019s overall messaging about the growth potential for LBC, and thus the SEC is correct that potential investors would understand that LBRY was pitching a speculative value proposition for its digital token.\u201d And the court rejected LBRY\u2019s attempt to dismiss the significance of its statements by arguing that the relevant tweets and blog posts only constituted 0.25% of LBRY\u2019s total of 8,805 posts and messages. Because, as Judge Barbadoro reasoned, LBRY made \u201cno effort to tally the number of comparable statements to those identified by the SEC.\u201d<\/p>\n Other Key Takeaways<\/strong><\/p>\n SEC v. LBRY<\/em> is yet another victory for the SEC, and a reminder of some of the risks and uncertainties for digital asset innovators. But as a single district court decision based on facts and circumstances unique to the case, it may not be the earthquake many fear.<\/p>\n [3]<\/sup><\/a> According to the order, the LBRY network was designed to eventually have a circulation of approximately 1 billion LBC. Most of the LBC would be released in the future to compensate miners, but when the LBRY blockchain launched in June 2016, LBRY reserved a \u201cpre-mine\u201d of 400 million LBC for itself, and allocated 200 million to a community fund for spreading usage and adoption of the network, 100 million to an institutional fund for institutional partnerships, grants and donations, and 100 million to an operational fund for LBRY\u2019s operational purposes.<\/p>\n<\/div>\n [4]<\/sup><\/a> William Hinman, Dir. Sec. Exch. Comm\u2019n Div. Corp. Fin., Digital Asset Transactions: When Howey Met Gary (Plastic) (June 14, 2018), https:\/\/www.sec.gov\/news\/speech\/speech-hinman-061418<\/a>; Nikhilesh De & Mahishan Gnanaseharen, SEC Chief Touts Benefits of Crypto Regulation, CoinDesk (Apr. 6, 2018, 4:16 PM), https:\/\/www.coindesk.com\/sec-chief-not-icos-bad\/<\/a>; Strategic Hub for Innovation and Financial Technology, Framework for \u201cInvestment Contract\u201d Analysis of Digital Assets (Apr. 3, 2019), https:\/\/www.sec.gov\/corpfin\/framework-investment-contract-analysis-digital-assets#_edn1<\/a>.<\/p>\n<\/div>\n\n
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