A lawsuit filed by the United States Securities and Exchange Commission (SEC) against Terraform Labs is moving forward after a U.S. judge denied the firm’s motion to dismiss on July 31. The judge also rejected a previous ruling that stated Ripple did not violate securities laws. The SEC initially filed the suit against Terraform Labs and its founder Do Kwon on February 16, accusing them of orchestrating a multi-billion dollar crypto asset securities fraud.
In April, Terraform Labs’ legal representatives filed a motion to dismiss the suit, arguing that the SEC lacked jurisdiction over the company and its founder. They also disputed the agency’s claim that tokens such as Mirror Protocol (MIR), Terra Classic (LUNA), and TerraUSD Classic (USTC) are securities. Furthermore, they cited a procedural issue in the SEC’s suit against Coinbase and newly disclosed emails related to former SEC director William Hinman that played a role in the agency’s case against Ripple Labs.
Despite these arguments, Judge Jed Rakoff of the Southern District Court of New York denied the defendants’ motion to dismiss. He stated that all well-pleaded allegations must be taken as true for the purposes of the motion and all reasonable inferences must be drawn in the SEC’s favor. Judge Rakoff also dismissed the idea that the major questions doctrine, which arose from a Supreme Court ruling, applied to this case.
The judge devoted several pages to analyzing the Howey test, which was central to the discussion of the Hinman emails. He emphasized that a formal contract is not necessary to meet the test and that tokens themselves can be considered in arguments before the court. In addition, the court rejected the approach taken by another judge in a similar case involving Ripple Labs, stating that Howey does not distinguish between primary and secondary purchasers of tokens.
This rejection of the distinction made in the Ripple case could potentially benefit the SEC if other judges follow Rakoff’s example. The ruling indicates that tokens sold on the secondary market could be considered securities, contradicting the partial win that Ripple had obtained in its case against the SEC.
As the lawsuit against Terraform Labs moves forward, it will be closely watched to see how the court’s decision could impact the broader cryptocurrency industry. The outcome of this case may have significant implications for the regulation of cryptocurrencies and could shape future legal interpretations of securities laws in the context of digital assets.
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