When Do Secondary Token Sales Violate Howey?

A federal judge overseeing the U.S. Securities and Exchange Commission’s case against Binance ruled that most of the case can proceed, but dismissed charges tied to the sale of BUSD and secondary sales of BNB.

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Late Friday, Judge Amy Berman Jackson from the U.S. District Court for the District of Columbia ruled that the Securities and Exchange Commission had brought plausible allegations against Binance, Binance.US and Changpeng Zhao, refusing to dismiss most of the charges against the companies. She did, however, dismiss a charge tied to secondary sales of BNB by sellers who aren’t Binance, a charge tied to the sale of BUSD and a charge tied to Binance’s “Simple Earn” product.

One question around the application of securities law to cryptocurrencies is whether secondary sales are also investment contracts. We’ve seen a few rulings from district courts, but nothing from appeals courts yet.

Judge Jackson’s ruling mostly maintained the current status quo in terms of litigation around crypto and securities – she ruled that the major questions doctrine does not apply, that the SEC’s arguments are (mostly) plausible and that there is a reasonable case to be made based on the facts as alleged.

It’s an interesting ruling that everyone will likely pull from. In a blog post on Tuesday, Binance mostly reiterated the court’s ruling and said it “recognizes there are critical limits on the SEC’s regulatory authority over the crypto industry.”

The judge’s ruling did allow most of the charges to move forward, including counts tied to the BNB initial coin offering and Binance’s own ongoing sales of the token; the BNB Vault; Binance.US‘s staking service; Exchange Act violations (both registration and control person allegations); and anti-fraud provisions under the Securities Act.

I imagine we’ll learn more about the arguments around those charges as the case proceeds. In the nearer-term, the judge’s ruling on secondary sales by sellers other than Binance – she dismissed this charge – and stablecoins (well, one stablecoin) – she dismissed a charge here too – are already being hailed within the crypto industry.

The judge pointed to transcripts from various hearings in her ruling, noting that SEC attorneys said in court that they are not taking the position that a token on its own is a security but saying that, in her view, the SEC seemed to still take the position that if a token’s initial sale carried marketing materials or other factors that suggested it was a security, those factors would continue to apply through future sales (see footnote 15).

“Insisting that an asset that was the subject of an alleged investment contract is itself a ‘security’ as it moves forward in commerce and is bought and sold by private individuals on any number of exchanges, and is used in any number of ways over an indefinite period of time, marks a departure from the Howey framework that leaves the Court, the industry, and future buyers and sellers with no clear differentiating principle between tokens in the marketplace that are securities and tokens that aren’t,” the judge wrote.

However, the judge seemingly left the door open for other arguments in future cases around secondary transactions, writing in subsequent paragraphs that “more is needed” to support the SEC’s arguments about ongoing sales of tokens. Indeed, the judge said in a few places that one big issue may be that the SEC just didn’t have enough in its filings or oral arguments at this time.

On Monday, attorneys for Coinbase filed notices in both the SEC case against the exchange and the exchange’s appeal for rulemaking including Friday’s decision.

In its letter to Judge Katherine Polk Failla, who’s overseeing the SEC case against Coinbase, the exchange’s attorneys argued that Friday’s decision supports its motion for an interlocutory appeal – the exchange wants an appeals court to rule on how secondary trades fit into the definition of an “investment contract” – because it goes against the SEC’s arguments against such an appeal.

“The Binance decision compounds the confusion for the industry and its customers. Two learned district courts, analyzing economically identical transactions on two of the largest crypto trading platforms in the United States, have reached diametrically opposed views as to whether those transactions may constitute securities transactions,” Coinbase’s notice said. “The result of the SEC’s litigation-focused approach to crypto regulation is that market participants now face different rules, not only in different courts in this District, but in different federal courts around the country.”

In a response on Wednesday, SEC attorneys wrote that Friday’s decision supports Judge Failla’s ruling on Coinbase’s original motion for judgment and supports rejecting the motion for interlocutory appeal.

Friday’s ruling highlighted the role of the Howey Test and that the question around secondary transactions was facts and circumstances-based, the SEC team wrote.

“Moreover, in concluding that the SEC had not sufficiently pled that certain secondary sales of BNB were investment contracts, the Decision made clear that this ruling was based on the particular facts pled in the complaint then before it,” the SEC attorneys wrote. “… Contrary to Coinbase’s contention here, the Decision made no general pronouncement as to whether ‘secondary market crypto transactions were investment contracts under Howey.'”

The ruling, in other words, doesn’t have any effect on the allegations the SEC brought against Coinbase or the digital assets the SEC alleged were securities in its complaint, the regulator said.

Of course, there’s also a broader backdrop to this whole thing. In the last few days, the U.S. Supreme Court published three significant decisions that may affect the crypto industry’s relationship with federal regulators moving forward. The first, on Thursday, was its ruling in SEC v. Jarkesy, wherein the high court ruled that the SEC and other federal regulators couldn’t use in-house administrative proceedings to hear cases.

CoinDesk’s Cheyenne Ligon reported that there haven’t been that many cases in the crypto industry that were resolved through these administrative proceedings so far, so this may not have too big an impact.

On Friday, the Supreme Court overturned the 40-year-old Chevron Deference precedent, ruling that the earlier Supreme Court had created an “unworkable” doctrine.

And on Monday, the Supreme Court ruled that there is no statute of limitations on when private parties can sue a federal agency’s rulemaking, which might confound the industry’s hopes of forcing the SEC to craft crypto-specific rules.

Thursday

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