Coinbase, the largest US cryptocurrency exchange, received strong support from six securities law academics in its legal battle with the Securities and Exchange Commission (SEC).
Law Professors at Major Universities in the U.S. Submit Amicus Summary in Favor of Coinbase to Court
Law professors from Yale, the University of Chicago, UCLA, Fordham, Boston University and Widener presented an amicus brief on Friday arguing that the SEC's “investment contract” theory is flawed and inconsistent with the term's historical and legal context.
In June 2023, the SEC sued Coinbase, alleging that the exchange violated securities laws by offering a lending program called Lend that would allow customers to earn interest on their crypto assets. Coinbase denied the allegations and argued that Lend is not a security, but a simple service with no contractual rights or obligations.
In the summary, the term “investment contract” traces its history before, during and after the adoption of the Securities Act in 1933 and shows that it is understood to mean a contractual arrangement that entitles an investor to a share of the seller's subsequent income, profits or assets.
The summary also states that the Supreme Court's SEC v. WJ Howey Co. (1946) that set up a four-part test to determine whether a regulation is an investment contract: (1) investing money; (2) a joint venture; (3) there is a reasonable expectation of profit; (4) profit from the efforts of others.
It is also argued that the Howey test does not change the meaning of the concept of “investment contract”, but rather clarifies its application to new situations.
The summary presented by the academics highlights that the common thread for investment contracts is that an investor is promised an ongoing contractual interest in the income, profit or assets of the business through his investment.
The summary concludes that Coinbase's Lend program does not meet the definition of an “investment contract”. According to academics, Lend is rather a simple service that allows customers to lend their crypto assets to Coinbase for a fixed period of time and receive a fixed interest rate in return.
The Amicus brief was considered by some cryptocurrency lawyers to be a devastating blow to the SEC's case. Bill Morgan, a lawyer specializing in crypto law, commented on X:
“This is a huge improvement. Doesn't it raise some doubts about the accuracy of this determination against Ripple in the Torres decision? If the six Securities Law scholars were right, it would appear that Torres J. was wrong in his decision.”
In these comments, Morgan was referring to another lawsuit filed by the SEC against Ripple Labs, the company behind XRP. New York Southern District Judge Analisa Torres ruled in favor of Ripple at this point in March 2023, finding that XRP was not a security when traded on secondary markets. However, he said that the tokens sold by Ripple are securities.
*Not investment advice.
