November 7, 2022

Federal District Court Rules LBRY Tokens Are Unregistered Securities

The U.S. District Court for the District of New Hampshire (the "Court") ruled that digital asset company LBRY violated U.S. securities laws by selling tokens that were securities without registering the tokens with the SEC.

The Court determined that the LBC tokens that LBRY issued and sold in various transactions were "investment contracts" under the Supreme Court's Howey test. As such, the tokens were deemed securities that needed to be registered with the SEC, absent a registration exemption. The Court determined that LBRY's offerings of LBC tokens led investors to have a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others.

Specifically, the Court based its ruling on (i) LBRY's representations to prospective purchasers, (ii) the company's business model and (iii) the consumptive and speculative uses of the LBC tokens. Among other things, the Court noted the following:

  • LBRY's Representations. The Court emphasized various communications made by officers of LBRY regarding the value of LBC tokens and their potential appreciation. In particular, the Court noted blog posts from LBRY that "tout[ed] the rapid growth in LBC's value," as well emails, interviews and other social media posts from senior LBRY officers that were "representative of LBRY's overall messaging about the growth potential for LBC" leading potential investors to "understand that LBRY was pitching a speculative value proposition for its digital token."

  • LBRY's Business Model. The Court stated that even if LBRY "had never explicitly broadcast its views [on LBC's growth value], any reasonable investor who was familiar with the company's business model would have understood the connection." The Court determined that because LBRY retained "hundreds of millions of LBC for itself, LBRY also signaled that it was motivated to work tirelessly to improve the value of its blockchain for itself and any LBC purchasers." The Court said LBRY's business model of "intertwining LBRY's financial fate with the commercial success of LBC . . . made it obvious to [LBRY's] investors that it would work diligently to develop the Network so that LBC would increase in value."

  • Consumptive and Speculative Uses of LBC Tokens. LBRY argued that LBC was a utility token designed for use on the LBRY Blockchain, and that some purchasers of LBC acquired LBC for purposes of holding it rather than using it as an investment. The Court concluded that "nothing in the case law suggests that a token with both consumptive and speculative uses cannot be sold as an investment contract." The Court stated further that while "some unknown number of purchasers may have acquired LBC in part for consumptive purposes, this does not change the fact that the objective economic realities of LBRY's offerings of LBC establish that it was offering it as a security."

In addition to the Court's determination that LBC tokens are securities, the Court rejected LBRY's argument that it did not receive fair notice from the SEC that its offerings were subject to the securities laws.

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