In a decision issued in SEC v . Terraform Labs Pte . Ltd . just two weeks after this summer ' s Ripple holding , U . S . District Judge Jed Rakoff of the Southern District of New York denied crypto asset company Terraform Labs ' motion to dismiss the SEC ' s claims of unregistered securities offerings and fraud , rejecting the defendants ' argument that they were unaware that their conduct could be subject to federal securities laws .[ 3 ]
He held that the Howey test for determining whether an instrument is an investment contract has been clearly established law for over 70 years and that defendants ' specific conduct of offering and selling Terraform ' s LUNA tokens and UST stablecoins without registration falls squarely within the heartland of conduct prohibited by securities laws .
Therefore , despite the SEC ' s rulemaking equivocation , Judge Rakoff showed no hesitation in ruling that Terraform — and CEO Do Kwon — were aware that their conduct could violate federal securities laws .
It must be pointed out , however , that the Terraform holding was in the motion to dismiss context and took the allegations of the SEC ' s complaint at face value . Once evidence is considered by a jury , the answer could be very different .
For example , Ripple itself was able to unearth statements made by an SEC official in 2018 that he personally did not believe that the cryptocurrency ether was a security . And internal emails related to that speech suggested that the SEC was worried that those comments could be construed by members of the public — like Garlinghouse and Larsen — to mean that certain digital assets are not securities .
One thing is for certain : Following last year ' s crypto winter , there is no shortage of crypto defendants being pursued by the SEC . Time will tell whether the SEC is able to enforce securities laws against these individual defendants , or if this summer ' s stumble has a ripple effect into the future .
Keith Blackman is a partner at Bracewell LLP .
The opinions expressed are those of the author ( s ) and do not necessarily reflect the views of their employer , its clients , or Portfolio Media Inc ., or any of its or their respective affiliates . This article is for general information purposes and is not intended to be and should not be taken as legal advice .
[ 1 ] Sec . & Exch . Comm ' n v . Ripple Labs , Inc ., No . 20-CV-10832 ( AT ).
[ 2 ] Indeed , multiple foreign regulators had determined that XRP was not a security , and even the DOJ and Treasury Department had categorized XRP as a " virtual currency " back in 2015 .
[ 3 ] Sec . & Exch . Comm ' n v . Terraform Labs Pte . Ltd ., No . 23-CV-1346 ( JSR ), 2023 WL 4858299 , at * 10 ( S . D . N . Y . July 31 , 2023 ).