{"id":35977,"date":"2022-11-23T07:14:19","date_gmt":"2022-11-23T07:14:19","guid":{"rendered":"http:\/\/egrowonline.com\/?p=35977"},"modified":"2022-11-23T07:14:19","modified_gmt":"2022-11-23T07:14:19","slug":"blockchain-token-lbc-ruled-a-security-in-non-ico-offering-fin-tech","status":"publish","type":"post","link":"http:\/\/egrowonline.com\/?p=35977","title":{"rendered":"Blockchain Token LBC Ruled A Security In Non-ICO Offering – Fin Tech"},"content":{"rendered":"


\n<\/p>\n

\n

OVERVIEW<\/h3>\n

On November 7, 2022, the United States District Court for the
\nDistrict of New Hampshire ruled<\/a> that the digital asset LBRY Credits
\n(LBC), offered to purchasers by LBRY, Inc., is an unregistered
\nsecurity for U.S. federal securities law purposes. This summary
\njudgment follows a March 2021 Securities and Exchange Commission
\n(SEC) enforcement action<\/a> in which the agency claimed
\nthat LBRY’s offer and sale of LBC violated Sections 5(a) and
\n5(c) of the Securities Act of 1933 prohibiting unregistered
\nofferings or sales of securities in interstate commerce. Ruling in
\nfavor of the SEC, the court determined that LBRY offered LBC as a
\nsecurity and rejected LBRY’s argument that it lacked “fair
\nnotice.”<\/p>\n

BACKGROUND<\/h3>\n

LBRY is the blockchain protocol on which the LBRY Network,
\nincluding media platform Odysee, is built. Blockchain<\/a> is a technological system in which
\na digital list of records is stored across a decentralized network
\nof computers. Blockchain is the primary technology of
\ncryptocurrencies but can be used to store a wide variety of
\ninformation. LBC, LBRY’s native token released in 2016, is used
\nto compensate LBC miners as well as reward viewers and creators
\nalike for using the LBRY Network.<\/p>\n

In March 2021, the SEC filed an enforcement action against LBRY
\nalleging that the company did not file required registration of its
\nLBC offerings with the SEC. Raised on both parties’
\ncross-motions for summary judgement was whether LBRY offered LBC as
\na security and whether the SEC gave LBRY fair notice that its
\nofferings were subject to securities laws.<\/p>\n

ISSUES<\/h3>\n

LBC As a Security<\/strong><\/p>\n

In ruling that LBRY offered LBC as a security, the court relied
\non the definition of an “investment contract” established
\nin the seminal U.S. Supreme Court decision SEC v. W.J. Howey
\nCo<\/em>. As discussed in a previous Non-Fungible Insights post,
\n“First Civil Litigation in the U.S. Brought in
\nResponse to the Crash of the Stablecoin TerraUSD<\/a>“, under
\nthe Howey<\/em> test, a financial instrument is an investment
\ncontract, a type of security, when there is: (1) the investment of
\nmoney; (2) in a common enterprise; (3) with an expectation of
\nprofits; (4) derived solely through the efforts of others. Here,
\nLBRY disputed only the third and fourth prongs of the
\nHowey<\/em> test.<\/p>\n

(a) LBRY’s Representations to Potential
\nPurchasers<\/strong><\/em><\/p>\n

In favor of the SEC, the court emphasized a series of LBRY
\npublic communications with potential purchasers that LBC would grow
\nin value through the company’s managerial and entrepreneurial
\nefforts. The court delved into numerous LBRY blog posts, emails
\nbetween company officials and potential purchasers, LBRY’s
\ncommunications with Reddit users, interviews with company
\nofficials, and essays- all content that the court determined showed
\nan indication of an expectation of profits. For example, the court
\nhighlighted a blog statement by LBRY’s CEO, Jeremy Kauffman,
\nwhere he placated LBC holders when the LBC price was down in
\nNovember 2016. The court noted that Kauffman was publicly
\nencouraging LBRY’s holders to “hold onto [their LBC] (or
\nspend it to buy some of [LBRY’s] great content” and
\nstressed LBRY’s long term goal of “building a product that
\nis compelling enough to change people’s habits” that could
\neven replace YouTube and Amazon. The court held that LBRY had been
\nsending a consistent message to its holders that “the
\nlong-term value proposition of LBRY is tremendous,” ever since
\nthe launch of the LBRY Network in June 2016.<\/p>\n

(b) LBRY’s Business Model<\/strong><\/em><\/p>\n

The court likewise held that even if LBRY had not been so public
\nabout its profit expectations, LBRY’s profitability necessarily
\nturned on its ability to grow LBC’s value through the
\ncompany’s managerial and entrepreneurial efforts. The court
\nexplained that any reasonable purchaser would understand that,
\nsince the beginning, LBRY’s profitability would necessarily
\nturn on the company’s ability to grow the value of LBC by
\nincreasing the usage of the LBRY Network. To support its holding,
\nthe court once again pointed to Kauffman’s prior statements and
\nposts on LBRY’s website: highlighting one post that stated
\n“since Credits only gain value as the use of the protocol
\ngrows, the company has an incentive to continue developing this
\nopen-source project.”<\/p>\n

(c) Consumptive Uses for LBC<\/strong><\/em><\/p>\n

Last, the court explicitly rejected LBRY’s arguments that
\nLBC could not be a security because LBC purchases were made with
\nconsumptive intent. The court rejected statements from several LBC
\nholders explaining that they had purchased LBC with limited
\nrelevance in determining whether LBRY was offering LBC as a
\nsecurity. Instead, the court stated that the inquiry should be
\nfocused on what the purchasers were offered or promised, and the
\ncourt made it clear that “nothing in the case law suggests
\nthat a token with both consumptive and speculative uses cannot be
\nsold as an investment contract.”<\/p>\n

Fair notice by the SEC<\/strong><\/p>\n

The court then considered whether LBRY received fair notice from
\nthe SEC that its offerings were subject to federal securities laws.
\nLBRY argued it lacked fair notice that its issuance of digital
\ntokens would be subject to registration requirements because the
\nSEC had previously focused its guidance and enforcement efforts
\nexclusively on the issuance of digital assets in the context of
\ninitial coin offerings (ICOs).<\/p>\n

Rejecting this argument, the court noted that LBRY did not offer
\na persuasive reading of Howey<\/em> that only ICOs are subject
\nto registration requirements. The court also noted that the SEC has
\nnever suggested companies need to comply with registration
\nrequirements only when conducting an ICO. Determining that
\n“the SEC…based its [enforcement action] on a straightforward
\napplication of a venerable Supreme Court precedent” and not
\n“a novel interpretation of a rule that by its terms does not
\nexpressly prohibit the relevant conduct,” the court found that
\nLBRY received fair notice that its unregistered issuance of LBC was
\nunlawful.<\/p>\n

IMPLICATIONS<\/h3>\n

This ruling, while limited in its precedential impact, is likely
\nto embolden the SEC’s aggressive position regarding which
\ndigital assets constitute securities under U.S. law. As the court
\nnoted, “this is the first case in which the SEC has attempted
\nto enforce the registration requirement against an issuer of
\ndigital tokens that did not conduct an ICO.” Focusing on the
\n“economic realities” of LBRY’s offerings rather than
\nthe transactions’ forms, the court concluded that while
\nparticipation in an ICO may be relevant to the Howey<\/em>
\nanalysis, it alone is not dispositive. There are several other
\npending civil and governmental actions concerning the same core
\nissue, and it remains to be seen whether other courts will take the
\nsame position.<\/p>\n

Digital assets, such as LBC, will likely be subject to greater
\nscrutiny and regulatory enforcement in the near future as the SEC
\ncontinues focused efforts on digital asset issuers.<\/p>\n

We will continue to monitor developments in the digital assets
\nand blockchain technology industry and provide friends of the firm
\nwith updates as they become available.<\/p>\n

Winston & Strawn Associate Jacob Botros and Law Clerk
\nUriel Lee contributed to this blog post.<\/em><\/p>\n

The content of this article is intended to provide a general
\nguide to the subject matter. Specialist advice should be sought
\nabout your specific circumstances.<\/em><\/p>\n<\/div>\n


\n
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OVERVIEW On November 7, 2022, the United States District Court for the District of New Hampshire ruled that the digital asset LBRY Credits (LBC), offered to purchasers by LBRY, Inc., is an unregistered security for U.S. federal securities law purposes. This summary judgment follows a March 2021 Securities and Exchange Commission (SEC) enforcement action in […]<\/p>\n","protected":false},"author":1,"featured_media":840,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false}}},"categories":[39],"tags":[73,8510,12480,12482,983,12481,1349,474,452],"class_list":["post-35977","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ico","tag-blockchain","tag-fin","tag-lbc","tag-nonico","tag-offering","tag-ruled","tag-security","tag-tech","tag-token"],"jetpack_publicize_connections":[],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"http:\/\/egrowonline.com\/wp-content\/uploads\/2021\/12\/Mondaq_Share.jpg","_links":{"self":[{"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/posts\/35977","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/egrowonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=35977"}],"version-history":[{"count":1,"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/posts\/35977\/revisions"}],"predecessor-version":[{"id":35978,"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/posts\/35977\/revisions\/35978"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/egrowonline.com\/index.php?rest_route=\/wp\/v2\/media\/840"}],"wp:attachment":[{"href":"http:\/\/egrowonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=35977"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/egrowonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=35977"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/egrowonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=35977"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}