Last year, the Court in SEC v. Terraform Labs suggested, by denying the defendants’ motion to dismiss, that the sale of a digital asset to the public on a secondary market may constitute a security.[1]  Now, the Court has determined, as a matter of law, that crypto assets are securities. [2] 

Three days before the end of the year, the Court issued a summary judgment opinion determining that there is no genuine dispute that Terraform’s four crypto assets—UST,[3] LUNA, wLUNA, and MIR[4]—were securities because they are investment contracts.  The Supreme Court in Howey defined an investment contract as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promotor or a third party.” [5][6]  All four crypto assets satisfied the Howey test. 

The Court concluded that the crypto assets were securities based on a combination of efforts and repeated statements made by the defendants:

  • UST. Investors were led to believe that by depositing their tokens in a shared pool, they would yield “by far the highest stablecoin yield in the market.”
  • LUNA and wLUNA. Investors were led to believe that pooling the proceeds of their LUNA purchases would lead to further profits based on defendants’ efforts to further develop the Terraform blockchain. 
  • MIR. Similarly, the proceeds from the sale of MIR tokens were pooled together to improve the Mirror Protocol, and any profits derived from the use of the Mirror Protocol were distributed back to the investors.[7] 

The Court further determined that defendants sold the securities in unregistered offerings, particularly LUNA and MIR in unregistered transactions, in violation of Sections 5(a) and 5(c) of the Securities Act. This is a major victory for the SEC, which has already cited the decision in the Binance case. 

So, what happens next?  The Court has resolved three of the six claims in the SEC’s Amended Complaint against the defendants.[8]  But the Court determined that there were genuine issues for trial on the SEC’s fraud claims.  The Court will adjudicate the remaining claims of fraud against the defendants at trial scheduled for January 29, 2024.

[1] See our post on Federal Court in Terraform Labs Rejects Ripple Decision.

[2] SEC v. Terraform Labs Pte. LTD, No. 23-cv-1346 (JSR), 2023 U.S. Dist. LEXIS 230518, at *42 (S.D.N.Y. Dec. 28, 2023).

[3] Also known as “stablecoin.”

[4] The “Mirror Protocol” which allowed users to obtain “mAssets” – tokens whose value was intended to mirror the price of a pre-existing crypto asset, such as a publicly traded security. 

[5] SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946).

[6] The Court “declined defendants’ invitation” to “scrap” the definition of investment contract as defined by the Supreme Court, thereby effectively “cast[ing] aside decades of settled law of the Supreme Court and the Second Circuit.” Terraform Labs, 2023 U.S. Dist. LEXIS 230518, at *42-43.

[7] Id. at *42-51.

[8] The Court granted summary judgment for the SEC on Count IV of the Amended Complaint involving the defendants’ unregistered offers and sales of LUNA and MIR in violation of Sections 5(a) and 5(c) of the Securities Act; grants summary judgment for the defendants on Counts V and VI of the Amended Complaint, involving the alleged unregistered offers of and transactions in security-based swaps.  Id. at *79.