SDNY Denies Crypto Company's Motion to Dismiss SEC Charges; Disputes Distinctions Made in Ripple Decision

Steven Lofchie Commentary by Steven Lofchie

The U.S. District Court for the Southern District of New York ("SDNY") denied a Singapore-based crypto-assets company’s Motion to Dismiss SEC charges in connection with the sale of cryptocurrencies.

The SEC alleged that the company "orchestrated a multi-billion-dollar fraud involving the development, marketing, and sale of various cryptocurrencies." In its Motion to Dismiss, the company argued lack of personal jurisdiction and failure to state a claim under the securities laws, as the relevant transactions did not involve securities.

The SDNY found that the SEC satisfied its burden on jurisdiction by showing that the company (i) "purposefully directed" their activities at the United States by "avail[ing] [themselves] of the privilege[s] of conducting activities" in the U.S., including "the protections of its laws" and (ii) caused injuries that "arise out of or relate to" activities that were U.S. based. The District Court also found that the relevant transactions were "investment contracts" and thus involved the sale of securities.

The Court rejected the distinction made in the recent Ripple decision, that there might be a legal difference between identified investors and those persons who purchased in the secondary market. The Court stated that the defendant's claims that the rise in value of the crypto-assets would generate profits "for all crypto-asset holders . . . would presumably have reached individuals who purchased their crypto-assets on secondary markets -- and, indeed, motivated those purchases -- as much as it did institutional investors." The Court said: "simply put, secondary-market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf."

Happening Today: Webinar/CLE

Representatives from DLx Law, Morrison Cohen and Fried Frank will host a complimentary virtual seminar at 2 p.m. on SDNY’s recent Ripple decision and its impact for the digital asset industry (see related news). This program has been approved in accordance with the requirements of the New York State CLE Board for a maximum of 1.0 credit hour in Professional Practice.

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Certainly an interesting juxtaposition where one District Court expressly disputes the holding of a very recent, and important, decision by another Court in the same Circuit. Can the holdings be reconciled because the fact situations are distinguishable?

Lewis Cohen of DLx Law, Jason Gottlieb of Morrison Cohen, and I will discuss the Ripple decision and this case on today's 2 p.m. webinar. We will talk about the holdings, the impact on the digital asset industry and where the government and the regulators go from here.

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