SEC V. LBRY: Examining The Implications Of The SEC's Latest Victory For Cryptocurrency And Digital Asset Markets

• Published date: 09 December 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Technology, Financial Services, Securities, Fin Tech
• Law Firm: Ropes & Gray
• Author: Mr Ropes & Gray LLP, Private Client

On November 7, 2022, Judge Paul J. Barbadoro of the United States District Court for the District of New Hampshire granted the Securities and Exchange Commission's (SEC) motion for summary judgment in its suit against LBRY, Inc. (LBRY), a blockchain-based video-sharing platform.¹ The Court held that the "LBRY Credit" (LBC) coins that LBRY offered and sold constituted unregistered securities in violation of the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The Court also rejected LBRY's argument that it lacked fair notice of the application of U.S. securities laws to LBC, even though the SEC's prior enforcement actions in this context had focused principally on tokens characterized by an initial coin offering (ICO)'a form of promotion that LBRY did not use. The ruling is significant for the digital asset industry, as participants seek to achieve clarity regarding which assets qualify as securities, and is sure to be prominently featured going forward in SEC and private litigation contending that various digital assets are securities'including in the SEC's ongoing litigation against Ripple Labs (Ripple) before the Southern District of New York.²

Background:

Largely self-funded during its initial development, LBRY was founded as an effort to create a decentralized, open-source digital content sharing platform. In 2016, LBRY launched LBC, the network's native currency, which could be deployed on the LBRY blockchain to publish content, tip creators, buy paywall content, and compensate miners that supported the network. Unlike tokens that launched through ICOs, LBCs were sold directly through the LBRY application, while also being used to compensate employees and incentivize users. LBRY also reserved 400 million LBC tokens (out of a total supply of one billion) for itself.

The SEC brought an enforcement action against LBRY in March 2021, claiming that LBRY had offered and sold LBC as an unregistered security in violation of Sections 5(a) and 5(c) of the Securities Act. The SEC's suit seeks injunctive relief, disgorgement, and civil penalties. Both the SEC and LBRY submitted motions for summary judgment.

Parties' Arguments:

The SEC alleged that, from at least July 2016 to February 2021, LBRY sold LBC to numerous investors, including investors based in the United States. The complaint alleged that LBRY undertook an offering and sale of securities under federal securities laws without filing a registration statement for the offer and sale of the securities or qualifying for an exemption from registration. The complaint further alleged that, by failing to file a registration statement, LBRY denied investors required information about the company and the investment. The SEC...