Crypto, Securities Laws, and Judge Rakoff’s SEC v. Terraform Labs Decision: A Split Among Judges of the SDNY?

By Joseph B. Allen, Member, Corporate, Securities & Finance Practice Group

In July 2023, I wrote about a trial court decision in the Southern District of New York (SDNY) that held that, contrary to the arguments of the Securities and Exchange Commission (SEC), sales of certain crypto assets on exchanges were not subject to US federal securities laws. In late December 2023, however, a decision by a different judge in the same district mostly accepted the SEC’s arguments for a broad application of federal securities laws to crypto assets and did not make any distinction as to whether sales were made directly or over exchanges. Although the crypto assets and factual background of each case varied in many respects, the new ruling illustrates the regulatory uncertainty that currently pervades much of the market as a larger case involving Coinbase looms for 2024.

On July 13, 2023, Judge Analisa Torres of the U.S. District Court for the Southern District of New York issued a ruling on a tremendously important issue to the crypto industry – whether offers and sales of crypto assets are securities. To the surprise of some, her decision in SEC v. Ripple Labs, Inc. accepted arguments advanced by some industry participants that sales of crypto assets over exchanges were not sales of securities for purposes of U.S. federal securities laws.1

Caution was warranted following Judge Torres’ ruling. The ruling was more nuanced than some of the news articles discussing it suggested and accepted some SEC arguments that had been challenged by the industry. In addition, the ruling had limited precedential value as a trial court ruling, contained aspects that appeared vulnerable to criticism, and was just one among many court rulings on the topic that we’re likely to see in the coming years. The SEC said that it believed aspects of the ruling were wrongly decided and indicated it intended to appeal the decision.

In late December, we saw a ruling from a different trial court judge in the same district – Judge Jed Rakoff – that appeared to reject some aspects of Judge Torres’ earlier ruling that industry participants had celebrated. In a ruling on dueling motions for summary judgment, in SEC v. Terraform Labs Pte. Ltd., No. 1:23-CV-01346 (S.D.N.Y. December 28, 2023) (hereinafter Terraform Labs Pte.), Judge Rakoff held that there was “no genuine dispute” that the issuances of four (4) crypto assets created by Terraform Labs Pte. Ltd. (“Terraform Labs”), a Singapore-based company, constituted securities for purposes of the Securities Act of 1933.2

Judge Rakoff’s ruling shows that the SEC’s position that existing securities regulations apply to many transactions involving crypto assets cannot be written off quite yet. However, similar to Judge Torres’ earlier ruling, the precedential value of Judge Rakoff’s decision is limited and there may be aspects of his decision that are vulnerable to critique. This article will summarize and explore Judge Rakoff’s ruling and its implications, which are important as the industry and practitioners await a potentially more significant decision in the SEC’s ongoing lawsuit against Coinbase, the largest crypto exchange in the US.

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