On November 7 2022 Judge Paul J. Barbadoro of the United States District Court for New Hampshire granted Securities and Exchange Commission’s (SEC) motion summary judgment in its suit against LBRY Inc. (LBRY) a blockchain-based video-sharing platform.1 The held that “LBRY Credit” (LBC) coins LBRY offered sold constituted unregistered securities violation registration provisions Sections 5(a) 5(c) Act 1933. also rejected LBRY’s argument it lacked fair notice application U.S. laws to LBC even though SEC’s prior enforcement actions this context had focused principally on tokens characterized by an initial coin offering (ICO)—a form promotion did not use. ruling is significant digital asset industry as participants seek achieve clarity regarding which assets qualify securities sure be prominently featured going forward SEC private litigation contending various are securities—including ongoing Ripple Labs (Ripple) before Southern York.2 Background: Largely self-funded during development was founded effort create decentralized open-source content sharing platform. In 2016 launched network’s native currency could deployed blockchain publish content tip creators buy paywall compensate miners supported network. Unlike through ICOs LBCs were directly application while being used employees incentivize users. reserved 400 million LBC (out total supply one billion) itself. brought action March 2021 claiming security Act. seeks injunctive relief disgorgement civil penalties. Both submitted motions judgment. Parties’ Arguments: alleged that from at least July 2016 February numerous investors including investors based States. complaint undertook sale under federal without filing statement offer or qualifying exemption registration. further failing file statement denied required information about company investment. received approximately $12.2 proceeds sales LBC. parties filed cross-motions issue whether Supreme Court’s Howey test.3 argued because (1) money other consideration (2) purchasers invested into common enterprise pooled raised fund development operation platform (3) reasonable purchaser would expect earn profits derived efforts LBRY. pointed statements made personnel potential blog posts emails interviews allegedly suggesting value appreciate network developed. emphasized designated 300 “pre-mine” itself making single largest holder stake “made unmistakable financial incentive develop Network (and thereby increase long-term LBC).”4 support they consumptive nature with using on-chain activities rather than investment purposes “primary focus” promotional materials utility price appreciation stated explicitly marketing intended consumption network Additionally have subject never similar claim issuer outside ICO context. Findings: judgment concluding no trier fact reject contention security. Based parties’ stipulations only third element dispute so “the economic realities surrounding offerings led expectation entrepreneurial managerial LBRY.”5 SEC reasoned posts interviews signaled efforts. For example post following large LBC’s market cap team proposition tremendous but dependent our staying task hand: building thing.”6 Further email investor stated “if product has we plan credits should accordingly.”7 significance uses disclaimers investment holding such disclaimer contrary objective purchases. Notably found ignoring statements decision reserve hundreds millions itself “to too profit their holdings result assiduous efforts.” court defense receive laws. there precedent successfully enforcing requirements where conducted ICO. although participation might relevant factor determining constitutes offering determinative. instead adequate notice “based straightforward venerable been applied courts across country over more 70 years.”8 Implications: v. marks another victory line token issuers offerings.9 It first time security—a consistent view Chairman Gary Gensler who unequivocally many occasions he believes vast majority securities. Two aspects broad interpretation depending what extent adopted courts present challenges issuers. First took place consider While absence clear safe harbor relatively limited weight accorded here suggests industry’s shift past several years away structures may do little insulate products treated securities.10 Second endorsed own amount was own enough trigger prong Howey—an others. albeit dicta mere insiders stood gain appreciation sufficient minds conduct. This reasoning raises new questions doctrinal matter tends collapse second (a enterprise) third. A close alignment interests between project often viewed demonstrating “horizontal commonality” satisfy prong. By isolation meet Howey interpreted render two Howey’s prongs duplicative each other. “common enterprise” independent component test inconsistent substantial case law.11 front surprising additional reason: There reasons retain portions relate will value. portion facilitate validation transactions proof-of-stake optimize tokenomics constituencies—all any assumption appreciate. take some assess full impact decision follows heels Audet Fraser12 post-trial overturning jury’s verdict comes ahead much-anticipated case. pursued selling XRP Like utility context XRP. York bound Barbadoro’s judges choose adhere arguments rulings. event important data point industry look intersection firms dealing looking enter space please contact Ropes & Gray team.