US District Court Finds LBRY Tokens Are Securities

• Published date: 23 November 2022
• Subject Matter: Corporate/Commercial Law, Technology, Corporate and Company Law, Securities, Fin Tech
• Law Firm: BakerHostetler
• Author: Teresa Goody Guillén, Joanna Wasick, Adam Gale, Kevin R. Edgar, Robert A. Musiala Jr. and Veronica Reynolds

Takeaways:

• The Court granted the U.S. Securities and Exchange Commission's (the SEC) motion for summary judgment, holding that LBC tokens are securities and that the offers and sales of the tokens by LBRY, Inc. (LBRY) violated the federal securities laws.
• The Court held that based on the unique facts and circumstances in this case, the tokens are securities because purchasers bought the tokens for investment purposes based on, among other things LBRY employees' statements that LBC would increase in value due to LBRY's efforts and that LBRY holds a significant amount of LBC, which the Court stated incentivizes LBRY to make efforts to increase the token value, which would reasonably lead investors to believe the same.
• The Court's focus on statements made by LBRY employees after launch once again highlights the need for a cryptocurrency company to be very cautious as to its statements about the company's efforts and the token value, both before and after network launch.
• The Court held that the SEC gave LBRY fair notice that its token offerings were subject to the securities laws and, as such there was no due process violation.

LBRY Company Background

In 2016, crypto startup LBRY launched the LBRY network and the LBRY protocol, described by LBRY as a decentralized content sharing and publishing protocol that supports the creation of community-run digital marketplaces.¹ The same year, LBRY offered and sold native LBC tokens to the public for the purported purpose of allowing LBRY users to compensate content creators who publish content using the LBRY protocol and miners who process transactions on the LBRY network, a public, proof-of-work blockchain network.²

The SEC's Complaint

In March 2021, the SEC filed a complaint against LBRY alleging that the company's native LBC tokens are securities and that the company's failure to register the tokens was therefore a violation of U.S. securities laws and regulations. Specifically, the SEC's complaint alleged that the LBRY token was a type of security called an "investment contract,"³ defined by the Supreme Court in SEC v. W.J. Howey Co. as a contract, transaction or scheme whereby a person (1) invests money (2) in a common enterprise (3) with an expectation of profits derived from the efforts of the promoter or a third party.⁴ The SEC sought a permanent injunction enjoining LBRY from engaging in the "transactions, acts, practices, and courses of business" alleged in the complaint and disgorgement of all "ill-gotten gains"⁵ from the alleged unlawful conduct.

Court Deems LBRY Tokens Securities

On Nov. 7, 2022, the U.S. District Court for the District of New Hampshire (Court) ruled on the parties' cross-motions for summary judgment on the issues of (1) whether LBRY offered LBC as a security and (2) whether LBRY received fair notice that it needed to register its offerings of LBC. The Court granted the SEC's motion for summary judgment against LBRY on both issues based on a view of the...