A judge rules against the SEC’s proposal to classify LBRY’s secondary market token sale as a securities offering, which could have huge ramifications for the ongoing Ripple case.
Crypto attorney John Deaton successfully argued against giving the SEC a legal mandate to oversee token sales in secondary markets after successfully suing LBRY for offering its LBC token as a security.
Secondary market sales are not securities
Citing a legal paper analyzing 76 years of securities cases in the US, Deaton successfully argued that secondary market LBC sales were not securities.
“I am going to make clear that my order does not apply to secondary market sales,” the judge ruled. The judges were undecided on whether LBC was a safety. But Deaton argues that if the secondary sale of tokens is not a security, then the token is not a security.
In November 2022, the SEC received a favorable summary judgment against decentralized content distribution platform LBRY. The court ruled that LBRY offered its LBC token as an unregistered security. As part of its measures, the SEC sought an injunction from the judge to monitor LBC transactions on the secondary market. The proposal was met with much opposition from the crypto community, who argued that it unfairly stacks up all secondary market participants, regardless of whether they hold LBC on LBC’s network for its utility.
Naomi Brockwell, a content producer on the LBC network, had a case. Brockwell used LBC as a utility token, unaware of its investment potential. Deaton filed an amicus curiae brief on behalf of Brockwell, in which he claimed that his use of the token was purely utilitarian. In November, the SEC acknowledged that, like Brockwell, there were LBC holders who simply used the token on the platform. However, the judge’s summary judgment failed to address 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 important 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 the equally vague “secondary market” terminology in its case against Ripple. Furthermore, the SEC recently cited its LBRY summary judgment 21 times in its response to Ripple. This fact underlines the importance of the LBRY result for the Ripple case.
The SEC alleged in 2020 that Ripple sold XRP without registering it as a security in accordance with the Securities Act of 1933. XRP sales raised funds for Ripple Labs and two of its senior executives.
But according to a 1946 US Supreme Court ruling, the transaction, called an “investment contract,” is a security rather than any asset involved.
“For the purposes of the Securities Act, an investment contract (not defined by the Act) means a contract, transaction or scheme by which a person invests his own money in a common enterprise and expects profits solely from the efforts of the promoter or third party,” read the 1946 ruling document. Ripple has argued that XRP, a tool to facilitate money transfers, is not a security because it was sold in the secondary market, and profits were not frozen .
The SEC and Ripple have asked Judge Analisa Torres to use the information they have to make a decision without additional trials.
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