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Sale Of Crypto Assets By Promoter Held To Be Sale Of Securities Despite Claimed Utility Use Of Digital Assets By At Least Some Purchasers – Fin Tech



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Cryptoassets issued and promoted by LBRY, Inc. (LBRY) and sold
directly to investors constituted investment contracts and thus
securities, requiring registration with the Securities and Exchange
Commission (SEC), ruled a federal court in New Hampshire on
November 7. The decision was issued in response to a complaint
filed by the SEC in March 2021, against LBRY, and cross-motions for
summary judgment filed subsequently by both parties. The Complaint
alleged that LBRY engaged in sales of digital assets known as LBRY
credits (LBC) from at least July 2016 to February 2021, without
required registration.

According to the Court, LBRY argued that (1) it had not offered
LBCs as securities because, among other reasons, at least some
purchasers had acquired LBCs for actual use on a blockchain network
developed by LBRY, and (2) even if the SEC believed that LBCs were
securities, LBRY did not have fair notice of such a view prior to
the filing of the SEC’s complaint (and thus its due process
rights were violated). The Court rejected both arguments in
granting summary judgment to the SEC.

The decision was issued by the US District Court, District of
New Hampshire, by the Hon. Paul J. Barbadoro, US District
Judge.

Apparently, LBRY was a company founded in 2015 to enable users
to shares videos and other digital content using distributed ledger
technology without a singular host. To help fund its development,
the company sold LBCs directly to investors through LBRY
applications and some digital asset platforms.

Principally relying on the 1946 decision of the US Supreme
Court, in SEC v. W.J. Howey Co., the Court held that, as
sold by the defendant, LBCs were investment contracts as they
represented an investment of money in a common enterprise with the
expectation of profits through the efforts of a promoter or a third
party. In its decision, the Court pointed to numerous statements by
the defendant that it believed evidenced LBRY’s promotion of
LBC in a manner consistent with the standards of Howeyfor
an investment contract. The Court rejected arguments by LBRY that
(1) LBCs were utility tokens intended for use on the LBRY
blockchain and some persons solely acquired LBCs for such use; (2)
statements promoting LBC’s price or value were only a small
percentage of LBRY’s overall publicity regarding LBC; and (3) a
disclaimer it provided all investors noting that purchases of LBCs
should not be construed as an investment undercut the SEC’s
views that it sold LBCs as securities. The Court concluded that
“the objective economic realities of LBRY’s offerings of
LBC establish that it was offering it as a security.”

The Court also rejected arguments by defendant that, because its
sale of LBCs did not occur in the context of an initial coin
offering it was not given fair notice of the SEC’s regulatory
views. The defendant had claimed that all prior SEC enforcement
actions and guidance regarding required registration of digital
asset securities solely arose in the context of an ICO.

This decision was publicized while cross-motions for summary
judgment are pending before a US federal court in New York City in
the SEC’s enforcement action against Ripple Labs, Inc. and two of its principals.
In that enforcement action, the SEC alleged that the defendants
engaged in the unlawful offer and sale of XRP cryptoassets which it
termed “securities.”

Importantly, in Howey, theSupreme Court did not
conclude that the orange groves (let alone oranges) at issue were a
security; rather it was the circumstance of land sales contracts
and service contracts together that constituted an investment
contract and thus, a security.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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