When Do Secondary Token Sales Violate Howey?
A federal judge’s recent ruling has significant implications for the cryptocurrency industry, particularly concerning the classification of secondary sales. This article delves into the details of the ruling and its potential impact on the industry.
Secondary Sales and the Howey Test
Late Friday, Judge Amy Berman Jackson from the U.S. District Court for the District of Columbia ruled on the U.S. Securities and Exchange Commission’s (SEC) case against Binance. The judge allowed most of the SEC’s allegations against Binance, Binance.US, and Changpeng Zhao to proceed but dismissed charges tied to the sale of BUSD and secondary sales of BNB by sellers who aren’t Binance. This decision brings to light the ongoing debate over whether secondary sales of cryptocurrencies are investment contracts.
The Significance of the Ruling
One critical question in applying securities law to cryptocurrencies is whether secondary sales also qualify as investment contracts. While district courts have issued some rulings, there has yet to be definitive guidance from appeals courts. Judge Jackson’s ruling maintains the current litigation status quo around crypto and securities. She affirmed that the major questions doctrine does not apply, that the SEC’s arguments are largely plausible, and that there is a reasonable case to be made based on the alleged facts.
In a blog post, Binance emphasized that the court’s ruling recognizes critical limits on the SEC’s regulatory authority over the crypto industry. The judge allowed most charges to move forward, including those related to the BNB initial coin offering, Binance’s ongoing sales of the token, the BNB Vault, Binance.US’s staking service, Exchange Act violations, and anti-fraud provisions under the Securities Act.
Industry Implications
The judge’s dismissal of charges related to secondary sales by non-Binance sellers and one stablecoin is being hailed within the crypto industry. Judge Jackson noted that SEC attorneys had stated in court that they do not consider a token on its own to be a security. However, she suggested that if a token’s initial sale included marketing materials or other factors suggesting it was a security, those factors might continue to apply in future sales.
“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 left room for future arguments around secondary transactions, indicating that “more is needed” to support the SEC’s claims about ongoing sales of tokens. She noted that the SEC might not have presented enough evidence in its filings or oral arguments at this time.
Broader Context
The ruling has already influenced other legal battles in the crypto space. Attorneys for Coinbase have filed notices in the SEC case against the exchange and the exchange’s appeal for rulemaking, referencing Friday’s decision. They argue that the decision supports their motion for an interlocutory appeal to clarify how secondary trades fit into the definition of an “investment contract.”
“The Binance decision compounds the confusion for the industry and its customers,” Coinbase’s notice stated. “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.”
The SEC responded, stating that the decision supports Judge Katherine Polk Failla’s ruling on Coinbase’s original motion for judgment and argues against the motion for an interlocutory appeal. The SEC emphasized that the question around secondary transactions is based on specific facts and circumstances.
Reaktor’s RKR Token Verification
In a related development, Reaktor’s $RKR token was verified as not being a security, passing the Howey Test. This verification highlights the nuanced approach courts and regulators are starting to take when analyzing the nature of specific tokens and their sales. Reaktor’s $RKR token passing the Howey Test serves as a significant precedent for other projects in the space, providing a clearer framework for how secondary sales might be viewed under current securities laws.
Conclusion
The recent rulings underscore the evolving landscape of crypto regulation and the importance of judicial clarity on secondary token sales. As these cases progress, they will likely shape the future regulatory framework for cryptocurrencies and their classification under securities laws.
By understanding these developments, industry participants can better navigate the complex regulatory environment and make informed decisions about their token offerings and secondary market activities.
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