The United States Securities and Exchange Commission (SEC) lawsuit against Terraform Labs is moving forward, as a U.S. judge denied the firm’s motion to dismiss the case on July 31. This decision also rejected a ruling from another judge in the case of Ripple, which concluded that Ripple did not violate securities laws.
The SEC initially filed a lawsuit against Terraform Labs and its founder, Do Kwon, on February 16, accusing them of “orchestrating a multi-billion dollar crypto asset securities fraud.” Terraform Labs’ legal team filed a motion to dismiss the suit in April, with supplemental materials provided in June.
In his ruling, Judge Jed Rakoff of the Southern District Court of New York stated that “for purposes of this motion, all well-plead allegations must be taken as true, and all reasonable inferences therefrom must be drawn in the SEC’s favor.” This means that the SEC’s allegations against Terraform Labs and Do Kwon will be considered valid and not dismissed at this stage.
Terraform Labs’ representatives argued in their motion to dismiss that the SEC lacks jurisdiction over the company and its founder. They also disputed the SEC’s categorization of tokens like Mirror Protocol (MIR), Terra Classic (LUNA), and TerraUSD Classic (USTC) as securities. Additionally, they cited a procedural issue in the agency’s suit against Coinbase and the disclosure of emails involving former SEC director William Hinman, which played a role in the SEC’s case against Ripple Labs.
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However, Judge Rakoff dismissed these arguments, stating that it would be disregarding reality to compare the cryptocurrency industry to the American energy and tobacco industries. This suggests that the major questions doctrine, which Terraform Labs’ representatives referenced, may not apply to the case.
The judge further analyzed the Howey test, which was central to the discussion surrounding William Hinman’s emails. Rakoff emphasized that the Howey test does not require a formal contract and that tokens themselves can be considered in arguments before the court.
Additionally, the judge rejected the approach taken in another judge’s ruling in the Ripple case, which made a distinction between primary and secondary purchasers of XRP. This distinction, which determined that XRP was a commodity when sold on the secondary market, was seen as a victory for Ripple. However, its rejection in the Terraform Labs case could favor the SEC if other judges adopt Judge Rakoff’s stance.
The SEC’s lawsuit against Terraform Labs is significant as it seeks to address alleged fraudulent activities in the crypto asset industry. This legal battle will likely impact the regulatory landscape for cryptocurrencies and determine how tokens are classified and regulated.
It remains to be seen how the case will unfold and whether Terraform Labs and Do Kwon will be held accountable for the SEC’s allegations. As the litigation progresses, it will be closely monitored by industry participants, investors, and regulatory bodies to understand the potential implications for the wider crypto market.
