When Do Secondary Token Sales Violate Howey?

A
federal
judge
overseeing
the
U.S.
Securities
and
Exchange
Commission’s
case
against
Binance
ruled
that
most
of
the
case
can
proceed,
but
dismissed
charges
tied
to
the
sale
of
BUSD
and
secondary
sales
of
BNB.

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Late
Friday,
Judge
Amy
Berman
Jackson
from
the
U.S.
District
Court
for
the
District
of
Columbia

ruled
that
the
Securities
and
Exchange
Commission
had
brought
plausible
allegations
against
Binance,

Binance.US
and
Changpeng
Zhao,
refusing
to
dismiss
most
of
the
charges
against
the
companies.
She
did,
however,
dismiss
a
charge
tied
to
secondary
sales
of
BNB
by
sellers
who
aren’t
Binance,
a
charge
tied
to
the
sale
of
BUSD
and
a
charge
tied
to
Binance’s
“Simple
Earn”
product.

One
question
around
the
application
of
securities
law
to
cryptocurrencies
is
whether
secondary
sales
are
also
investment
contracts.
We’ve
seen
a
few
rulings
from
district
courts,
but
nothing
from
appeals
courts
yet.

Judge
Jackson’s
ruling
mostly
maintained
the
current
status
quo
in
terms
of
litigation
around
crypto
and
securities
–
she
ruled
that
the
major
questions
doctrine
does
not
apply,
that
the
SEC’s
arguments
are
(mostly)
plausible
and
that
there
is
a
reasonable
case
to
be
made
based
on
the
facts
as
alleged.

It’s
an
interesting
ruling
that
everyone
will
likely
pull
from.
In
a

blog
post
on
Tuesday,
Binance
mostly
reiterated
the
court’s
ruling
and
said
it
“recognizes
there
are
critical
limits
on
the
SEC’s
regulatory
authority
over
the
crypto
industry.”

The
judge’s
ruling
did
allow
most
of
the
charges
to
move
forward,
including
counts
tied
to
the
BNB
initial
coin
offering
and
Binance’s
own
ongoing
sales
of
the
token;
the
BNB
Vault;

Binance.US‘s
staking
service;
Exchange
Act
violations
(both
registration
and
control
person
allegations);
and
anti-fraud
provisions
under
the
Securities
Act.

I
imagine
we’ll
learn
more
about
the
arguments
around
those
charges
as
the
case
proceeds.
In
the
nearer-term,
the
judge’s
ruling
on
secondary
sales
by
sellers
other
than
Binance
–
she
dismissed
this
charge
–
and
stablecoins
(well,
one
stablecoin)
–
she
dismissed
a
charge
here
too
–
are
already
being
hailed
within
the
crypto
industry.

The
judge
pointed
to
transcripts
from
various
hearings
in
her
ruling,
noting
that
SEC
attorneys
said
in
court
that
they
are
not
taking
the
position
that
a
token
on
its
own
is
a
security
but
saying
that,
in
her
view,
the
SEC
seemed
to
still
take
the
position
that
if
a
token’s
initial
sale
carried
marketing
materials
or
other
factors
that
suggested
it
was
a
security,
those
factors
would
continue
to
apply
through
future
sales
(see
footnote
15).

“Insisting
that
an
asset
that
was
the
subject
of
an
alleged
investment
contract
is
itself
a
‘security’
as
it
moves
forward
in
commerce
and
is
bought
and
sold
by
private
individuals
on
any
number
of
exchanges,
and
is
used
in
any
number
of
ways
over
an
indefinite
period
of
time,
marks
a
departure
from
the
Howey
framework
that
leaves
the
Court,
the
industry,
and
future
buyers
and
sellers
with
no
clear
differentiating
principle
between
tokens
in
the
marketplace
that
are
securities
and
tokens
that
aren’t,”
the
judge
wrote.

However,
the
judge
seemingly
left
the
door
open
for
other
arguments
in
future
cases
around
secondary
transactions,
writing
in
subsequent
paragraphs
that
“more
is
needed”
to
support
the
SEC’s
arguments
about
ongoing
sales
of
tokens.
Indeed,
the
judge
said
in
a
few
places
that
one
big
issue
may
be
that
the
SEC
just
didn’t
have
enough
in
its
filings
or
oral
arguments
at
this
time.

On
Monday,
attorneys
for
Coinbase

filed
notices
in
both
the
SEC
case
against
the
exchange
and
the
exchange’s
appeal
for
rulemaking
including
Friday’s
decision.

In
its
letter
to
Judge
Katherine
Polk
Failla,
who’s
overseeing
the
SEC
case
against
Coinbase,
the
exchange’s
attorneys
argued
that
Friday’s
decision
supports
its
motion
for
an
interlocutory
appeal
–
the

exchange
wants
an
appeals
court
to
rule
on
how
secondary
trades
fit
into
the
definition
of
an
“investment
contract”
–
because
it
goes
against
the
SEC’s
arguments
against
such
an
appeal.

“The
Binance
decision
compounds
the
confusion
for
the
industry
and
its
customers.
Two
learned
district
courts,
analyzing
economically
identical
transactions
on
two
of
the
largest
crypto
trading
platforms
in
the
United
States,
have
reached
diametrically
opposed
views
as
to
whether
those
transactions
may
constitute
securities
transactions,”
Coinbase’s
notice
said.
“The
result
of
the
SEC’s
litigation-focused
approach
to
crypto
regulation
is
that
market
participants
now
face
different
rules,
not
only
in
different
courts
in
this
District,
but
in
different
federal
courts
around
the
country.”

In
a
response
on
Wednesday,
SEC
attorneys
wrote
that
Friday’s
decision
supports
Judge
Failla’s
ruling
on
Coinbase’s
original
motion
for
judgment
and
supports
rejecting
the
motion
for
interlocutory
appeal.

Friday’s
ruling
highlighted
the
role
of
the
Howey
Test
and
that
the
question
around
secondary
transactions
was
facts
and
circumstances-based,
the
SEC
team
wrote.

“Moreover,
in
concluding
that
the
SEC
had
not
sufficiently
pled
that
certain
secondary
sales
of
BNB
were
investment
contracts,
the
Decision
made
clear
that
this
ruling
was
based
on
the
particular
facts
pled
in
the
complaint
then
before
it,”
the
SEC
attorneys
wrote.
“…
Contrary
to
Coinbase’s
contention
here,
the
Decision
made
no
general
pronouncement
as
to
whether
‘secondary
market
crypto
transactions
were
investment
contracts
under
Howey.'”

The
ruling,
in
other
words,
doesn’t
have
any
effect
on
the
allegations
the
SEC
brought
against
Coinbase
or
the
digital
assets
the
SEC
alleged
were
securities
in
its
complaint,
the
regulator
said.

Of
course,
there’s
also
a
broader
backdrop
to
this
whole
thing.
In
the
last
few
days,
the
U.S.
Supreme
Court
published
three
significant
decisions
that
may
affect
the
crypto
industry’s
relationship
with
federal
regulators
moving
forward.
The
first,
on
Thursday,
was
its
ruling
in

SEC
v.
Jarkesy,
wherein
the
high
court
ruled
that
the
SEC
and
other
federal
regulators

couldn’t
use
in-house
administrative
proceedings
to
hear
cases.

CoinDesk’s
Cheyenne
Ligon
reported
that
there
haven’t
been
that
many
cases
in
the
crypto
industry
that
were
resolved
through
these
administrative
proceedings
so
far,
so
this
may
not
have
too
big
an
impact.

On
Friday,
the
Supreme
Court

overturned
the
40-year-old

Chevron
Deference
precedent,
ruling
that
the
earlier
Supreme
Court
had
created
an
“unworkable”
doctrine.

And
on
Monday,
the
Supreme
Court
ruled
that
there
is

no
statute
of
limitations
on
when
private
parties
can
sue
a
federal
agency’s
rulemaking,
which
might
confound
the
industry’s
hopes
of
forcing
the
SEC
to
craft
crypto-specific
rules.

If
you’ve
got
thoughts
or
questions
on
what
I
should
discuss
next
week
or
any
other
feedback
you’d
like
to
share,
feel
free
to
email
me
at

nik@coindesk.com
or
find
me
on
Twitter

@nikhileshde.

You
can
also
join
the
group
conversation
on

Telegram.

See
ya’ll
next
week!