In a recent decision, a federal judge granted summary judgment for the Securities and Exchange Commission (SEC) finding that the LBC cryptocurrency token qualifies as a security.  While the ruling is confined to this specific token, it represents a victory for the SEC’s assertions that many cryptocurrencies, including so called “utility tokens,” represent securities that need to be registered with the agency.  The Court also held that the makers of the LBC token, LBRY, Inc., had fair notice that the token was subject to the securities laws.  Considering the ongoing class actions and enforcement proceedings litigating this issue across several cases, companies operating in the cryptocurrency space, including cryptocurrency exchanges, should follow this development to assess any possible impact on their businesses.

In the case, SEC v. LBRY, Inc., Ca. No. 21-cv-00260 (D.N.H. November 7, 2022), the SEC alleged that the LBC token constituted an unregistered security and filed suit in federal court asserting that LBRY was in violation of Section 5 of the Securities Act for offering and selling the token.  After both sides filed cross motions for summary judgment, the core issue before the Court was whether, under the Howey Test, “LBRY’s offerings of LBC led investors to have ‘a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.’” (quoting United Hous. Found. v. Forman, 421 U.S. 837, 852 (1975)).  LBRY argued that LBC was a utility token, in that its primary purpose was consumptive and used to enable token holders to access video and other digital content on the LBRY Network.  Therefore, it claimed that purchasers of its token expected to use them, rather than hold them as an investment.  The SEC, however, presented numerous public and private posts and communications by LBRY which SEC claimed highlighted the value proposition of the token for potential investors. 

In granting the SEC’s motion, the Court pointed to these communications, holding that “what the evidence in the record discloses is that LBRY promoted LBC as an investment that would grow in value over time through the company’s development of the LBRY Network” and “the objective economic realities of LBRY’s offerings of LBC establish that it was offering it as a security.”  The Court also held that despite this being a first-of-its-kind enforcement action, LBRY could not claim it did not have fair notice that it was in violation of the law, given the SEC’s “straightforward application of a venerable Supreme Court precedent” that is the Howey Test.

While the Howey Test is fact-specific and the holding is limited to this specific token, the SEC and class action plaintiffs litigating alleged securities laws violations by token companies and cryptocurrency exchanges will likely seek to apply the Court’s findings to their cases.

Photo of Sam Greeley Sam Greeley

Samuel Greeley is an associate in the firm’s Washington, DC office representing clients in government investigations and complex civil litigation.

Photo of Andrew Soukup Andrew Soukup

Andrew Soukup has a wide-ranging complex litigation practice representing highly regulated businesses in class actions and other high-stakes disputes. He has built a successful record of defending clients from consumer protection claims asserted in class-action lawsuits and other multistate proceedings, many of which…

Andrew Soukup has a wide-ranging complex litigation practice representing highly regulated businesses in class actions and other high-stakes disputes. He has built a successful record of defending clients from consumer protection claims asserted in class-action lawsuits and other multistate proceedings, many of which were defeated through dispositive pre-trial motions.
Andrew is co-chair of the firm’s Class Action Litigation practice group.

Andrew has helped his clients achieve successful outcomes at all stages of litigation, including through trial and appeal. He has helped his clients prevail in litigation against putative class representatives, government agencies, and commercial entities. Representative victories include:

  • Delivered wins in multiple nationwide class actions on behalf of large financial companies related to fees, disclosures, and other banking practices, including the successful defense of numerous lenders accused of violating the Paycheck Protection Program’s implementing laws, which contributed to Covington’s recent recognition as a “Class Action Group Of The Year.”
  • Successfully defending several of the nation’s leading financial institutions in a wide variety of litigation and arbitration proceedings involving alleged violations of RICO, FCRA, TILA, TCPA, FCBA, ECOA, EFTA, FACTA, and state consumer protection and unfair and deceptive acts or practices statutes, as well as claims involving breach of contract, fraud, unjust enrichment, and other torts.
  • Successfully defended several of the nation’s leading companies and brands from claims that they deceptively marketed their products, including claims brought under state consumer protection and unfair deceptive acts or practices statutes.
  • Obtained favorable outcomes for numerous clients in commercial disputes raising contract, fraud, and other business tort claims.

Because many of Andrew’s clients are subject to extensive federal regulation and oversight, Andrew has significant experience successfully invoking federal preemption to defeat litigation.

Andrew also advises clients on their arbitration agreements. He has successfully helped numerous clients avoid multi-district class-action litigation by successfully enforcing the institutions’ arbitration agreements.

Clients praise Andrew for his personal attention to their matters, his responsiveness, and his creative strategies. Based on his “big wins in his class action practice,” Law360 named Mr. Soukup a “Class Action Rising Star.

Prior to practicing law, Andrew worked as a journalist.

Photo of Ashley Simonsen Ashley Simonsen

Ashley Simonsen is a litigator whose practice focuses on defending complex class actions in state and federal courts across the country, with substantive experience in the three hotbeds of class action litigation: New York, San Francisco, and Los Angeles.

Ashley represents clients in…

Ashley Simonsen is a litigator whose practice focuses on defending complex class actions in state and federal courts across the country, with substantive experience in the three hotbeds of class action litigation: New York, San Francisco, and Los Angeles.

Ashley represents clients in the technology, consumer brands, financial services, and sports industries through all stages of litigation, including trial, with a strong track record of success on early dispositive motions. Her practice encompasses advertising, antitrust, product defect, and consumer protection matters. Ashley regularly advises companies on arbitration clauses in consumer agreements and related issues, including mass arbitration risks and issues arising under McGill v. Citibank, N.A. And she is one of the nation’s leading experts on “true lender” issues and the related “valid when made” doctrine.