SEC victory over LBRY has ramifications for Ripple and wider crypto market
LBRY's "fair notice" and utility token defense" was dismissed by New Hampshire District Court, leading to concern from the Ripple community.
The U.S. District Court of New Hampshire granted the SEC’s motion for summary judgment against LBRY on Nov. 7.
The SEC filings show LBRY had received $12.2 million — in cash and crypto — from the sale of LBRY Credits.
Judge Peter Barbadoro ruled that the blockchain-based file-sharing and payments platform had issued and sold securities, in its LBRY Credits token, contravening federal securities laws.
The lack of “fair notice,” in regard to the issuance and sale of LBRY Credits violating securities laws, was not a defense, said the judge.
The judge’s comments dealt a blow to Ripple supporters, who are well aware that Ripple’s defense team is also arguing a lack of fair notice in rebutting the SEC.
Lack of fair notice is not a defense
In December 2020, the SEC filed an action against Ripple on allegations it had sold $1.3 billion worth of unregistered securities since 2013.
Approaching the two-year mark since first filing, the SEC vs. Ripple case has broached numerous legal arguments and given an insight into the workings of the securities agency, including allegations of corruption.
A significant component of Ripple’s defense lies in the lack of fair notice given by the regulator. This argues that there was a lack of clarity and fair notice regarding Ripple’s obligations under securities law.
The point is further compounded by the SEC taking seven years to file an action, leading the Defendants to believe no violation of securities laws had been breached during this time.
Commenting on the LBRY ruling, Defense Lawyer James K. Filan said the New Hampshire Court deemed that the lack of fair notice held no weight in a court setting.
“Court finds “no reasonable trier of fact could reject the SEC’s contention that LBRY offered LBC as a security, and LBRY does not have a triable defense that it lacked fair notice, the SEC is entitled to judgment.“
Partner at the legal firm Hogan and Hogan, Jeremy Hogan, said that LBRY’s defense — on LBRY Credits being a utility token — was dismissed due to the lack of utility at the time of the sales.
Utility tokens provide access to a service rather than a specific investment in an asset. They are classified separately from securities tokens and do not require SEC registration under federal law.
Where does this leave Ripple?
Founder of Crypto-Law.us, John E. Deaton said the SEC will present the outcome of the LBRY case to Judge Torres to strengthen its arguments in the Ripple case. However, he added that this “doesn’t shake my confidence,” while teasing a full explanation later.
Earlier today, I said the @LBRYcom decision was a 💯 victory for @SECGov and said it read as if the SEC wrote it and the SEC will quote it to 👩⚖️ Torres in the @Ripple case. But the ruling doesn’t shake my confidence AT ALL regarding the #XRP case. I’ll explain tomorrow at 5 pm. https://t.co/Qdv2g7pTyu
— John E Deaton (@JohnEDeaton1) November 8, 2022
LBRY held a month-long Initial Coin Offering (ICO) that ended in April 2018, and as mentioned by Hogan, the token did not have a use at the time. Whereas the XRP ledger and XRP token existed before Ripple, with no ICO conducted.
The SEC argues that the determination of a token’s security status falls down to the Howey Test, which states the characteristics of a security include tokens and ICOs that market the potential for profits based on entrepreneurial or managerial efforts.
The crypto community awaits Deaton’s explanation.