SEC Sues Blockchain Startup LBRY for Selling Unregistered Securities
Yesterday’s Daily Digest focused on the U.S. Securities and Exchange Commission (SEC) legal action against Ripple for allegedly selling unregistered securities (i.e., XRP). On March 31 the SEC launched a similar lawsuit against blockchain company LBRY Inc., the startup that works to improve the LBRY network, for allegedly selling LBC tokens to fund its work, without registering those tokens with the SEC as a security. LBRY is a blockchain-based file-sharing and payment network that powers primarily social networks and video platforms.
Framework for “Investment Contract” Analysis of Digital Assets
Under U.S. law “investment contracts” are subject to the “Howey test” to determine whether their nature falls under what constitutes a “security” to be regulated under the U.S. Securities Exchange Act of 1934. The Howey test, established in SEC v. W. J. Howey Co. (1946), deems an investment contract to be a security only if it evidences “(1) an investment; (2) in a common enterprise; (3) with a reasonable expectation of profits; (4) to be derived from the entrepreneurial or managerial efforts of others”.
Deconstructing the SEC’s Cryptocurrency-Suppression Program
Meanwhile, the law firm Arnall Golden and Gregory LLP has launched a series of notes claiming that SEC actions like those against Ripple and LBRY are part of a program aimed at shutting down the crypto-asset industry. While the SEC’s rhetorical objective is to protect investors, the notes claim that the real objective of the “suppression program” is to prevent disintermediation.