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In mid-July, I blogged about the SDNY’s long-awaited order in SEC v. Ripple Labs, (SDNY 7/23), suggesting that the decision may not be the massive victory for crypto that some were calling it and lamenting that the Ripple decision was just one development in the crypto saga — certainly not bringing the regulatory clarity some had hoped. The latest crypto decision, also from the SDNY — SEC v. Terraform Labs, (SDNY 8/23) — supports these points. This Mayer Brown alert describes the decision:

Judge Jed Rakoff ruled this week in favor of the SEC on a motion to dismiss, finding the SEC’s amended complaint adequately pled that the crypto assets sold by Terraform Labs and its founder and Chief Executive Officer Do Keyong Kwon qualify as “investment contracts” under the Howey precedent. While this decision represents only a preliminary review of the issues and accepts the SEC’s allegations as true (for purposes of the motion), it provides useful commentary as well as some counterpoints to the Ripple analysis […]

Judge Rakoff appeared to agree with Judge Torres that digital assets do not constitute securities unless their offering, sale or use were tied to an economic benefit being conveyed upon the purchaser. However, Judge Rakoff also stated that a crypto asset that is not a security at one point in time may, as its circumstances and those of its related protocol(s) change, become an investment contract—i.e., a security—that is subject to SEC regulation.

The part of the decision certain to attract the most attention is Judge Rakoff’s explicit rejection of the approach used by Judge Torres in the recent Ripple ruling, which drew a distinction between digital assets based on the manner in which they were sold (primary issuance to institutional investors vs. secondary transactions involving retail investors). In doing so, Judge Rakoff stated that the Howey precedent does not differentiate among purchasers, because the manner in which digital assets are purchased would not change a purchaser’s reasonable belief in the promise of future profits. In the Terraform case, the SEC alleged that the defendants actively encouraged both retail and institutional investors to buy crypto assets while touting their ability to maximize returns on investors’ tokens.

This Jenner & Block alert gave the TL;DR on both decisions. Here it is:

Recent decisions appear to agree that:
– tokens, themselves, are not securities;
– some token sales are securities offerings, particularly those made directly from the issuer to a purchaser.

Recent decisions appear to disagree on whether or in what circumstances token sales are securities transactions in a secondary market;

The SEC sought leave to appeal the Ripple case, which may provide more substantial guidance next year.

– Meredith Ervine