A judge rules against a motion by the U.S. Securities and Exchange Commission to classify LBRY’s secondary market token sales as securities offerings, which could have a huge bearing on the ongoing Ripple case.
Crypto lawyer John Deaton successfully argued against granting the SEC a legal mandate to oversee token sales on secondary markets after the agency successfully sued LBRY for offering its LBC tokens as securities.
Secondary Market Sales Are Not Securities
Citing a legal paper analyzing 76 years of securities cases in the U.S., Deaton successfully argued that secondary market LBC sales were not securities.
“I’m going to make it clear that my order does not apply to secondary market sales,” the judge ruled. The judge was noncommittal on whether LBC was a security. But Deaton argues that if a token’s secondary sale is not a security, then the token is not a security.
In November 2022, the SEC received a favorable summary judgment against the decentralized content distribution platform LBRY. The court ruled that LBRY offered its LBC token as an unregistered security. As part of its Remedies, the SEC asked the judge for an injunction to oversee LBC transactions on the secondary market. This motion was met with much opposition from the crypto community, which argued that it unfairly lumps all secondary market participants even if they held LBC for its utility on LBRY’s network.
A case in point was Naomi Brockwell, a content creator on the LBC network. Brockwell used LBC as a utility token, unaware of its investment potential. Deaton filed an amicus brief on behalf of Brockwell to assert that her use of the token was purely utilitarian. In November, the SEC admitted that, like Brockwell, there were LBC holders who only used the tokens on the platform. However, the judge’s summary judgment failed to address the secondary market sales of LBC.
LBRY Case Sets Precedent for Ripple
Without imminent regulatory clarity from Congress, Deaton believes the outcome of the LBRY hearing is crucial for future securities cases. Judges’ rulings on similar issues give outside observers a window into the possible outcome of an ongoing case.
Specifically, Deaton points out that the SEC uses similarly vague “secondary markets” terminology in its case against Ripple. Additionally, the SEC mentioned its LBRY summary judgment 21 times in a recent reply brief to Ripple. This facts underscores the importance of the LBRY outcome for the Ripple case.
The SEC alleged in 2020 that Ripple sold XRP without registering it as a security according to the 1933 Securities Act. XRP sales raised money for Ripple Labs and two of its senior executives.
But according to a 1946 U.S. Supreme Court ruling, the transaction, called an “investment contract,” is a security rather than any assets involved.
“For purposes of the Securities Act, an investment contract (undefined by the Act) means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party,” documents from the 1946 ruling reads. Ripple has argued that XRP, a tool to facilitate money transfers, is not a security because it was sold on the secondary market, and profits were not pooled.
The SEC and Ripple requested Judge Analisa Torres use the information she has to make a ruling without an additional trial.
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