Law Professors Argue Digital Assets Are Not Investment Contracts
Commentary by Steven Lofchie
In an amicus brief filed in SEC v. Coinbase, Inc., a group of law professors argued that the sale of digital assets would generally not be considered an "investment contract" as that term was understood by the drafters of the Securities Act or Securities Exchange Act, and should not be considered an investment contract under the Howey opinion.
In the brief, filed in support of Coinbase's Motion for Judgment on the Pleadings in the U.S District Court for the Southern District of New York, the professors provide a history of the term "investment contract," as such term was used in State securities laws before the adoption of the Federal securities laws, and how the term was understood when it was included in the Federal securities laws. According to the professors, the term "investment contract," has always been used to mean an agreement that provides investors with a share in the returns on a business, and was used to include contracts that were effectively similar to a sale of stocks or debt securities. The professors stated that they did not find support for the SEC's position that the sale of digital assets is a transaction that could be fit into the term "investment contract," as the term has been understood historically. The legal analysis supports Coinbase's contention that the sale of these digital assets do not involve "securities" and therefore, the SEC does not have jurisdiction.
Commentary
The professors' conclusion is consistent with, and arguably goes well beyond, the recent decision by the Court in SEC v. Ripple, which found that the SEC lacked jurisdiction over sales of the relevant digital asset in the secondary market and even some of the primary sales. (See also, A Ripple in the Law Webinar, discussing the Ripple decision.)
In the brief, the professors make a strong argument that the SEC does not have the broad jurisdiction that it asserts over digital assets. Whether this District Court decides to adopt or reject these arguments, other courts are likely to find the brief and the Ripple decision persuasive. This means that, in the absence of legislation, there may not be any definitive view by the “courts” until the question reaches the Supreme Court, which could take quite some time.
To date, the SEC has simply refused to engage with the issue of how digital assets are different from ordinary securities and how they should be regulated. This means that if legislation governing digital assets is now to be adopted, and there is good reason that it should be in light of the complete jurisdictional uncertainty, it will have to be done somewhat on the fly and without the detailed regulatory analysis that should precede such legislation.