DeFi Fund, Apparel Firm Sue SEC Over "Airdrop Securities"

A DeFi Fund and an apparel company ("plaintiffs") sued the SEC to prevent it from taking any action against the clothing company's recent "airdrop" of tokens. The plaintiffs argued that the SEC "has adopted an aggressive and expansive view of its own authority to regulate virtually all digital assets and transactions involving digital assets."

In the Complaint, filed in the U.S. District Court for Western Texas, the plaintiffs contended that the airdrop tokens were not securities because they were distributed for free and not requested by the recipients. An airdrop, according to the Complaint, is a common means of distributing a new digital asset to preexisting digital asset users. The plaintiffs explained that an airdrop involves a token developer sending a token—for free—to users’ pre-existing public "wallets," or accounts. The clothing company said it had created a total of 100,000 tokens, of which 60,880 had been distributed to date.

The plaintiffs argued that the tokens were intended for free trading, with the expectation that their value would appreciate over time. They further argued that the tokens were distributed to users who took no action other than owning a digital wallet into which the tokens were airdropped, and there was no "meaningful consideration," such as "following" the company on social media. Therefore, according to the Complaint, there was no common enterprise and no promise to increase the value of the tokens. The plaintiffs said that the SEC "will take the position that [the company's] tokens are investment contracts and that the airdrop is a securities transaction subject to registration requirements under the Securities Act of 1933."

The plaintiffs are seeking court intervention to define the boundaries of the SEC’s jurisdiction under the Administrative Procedure Act ("APA") and to protect its business from SEC enforcement.