Home » 1940s precedent puts future of NH file-sharing firm in doubt – New Hampshire Bulletin

1940s precedent puts future of NH file-sharing firm in doubt – New Hampshire Bulletin

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In 1941, a Florida man hatched a plan to expand his citrus empire. However, he made a grave mistake that sparked a reverberating lawsuit in Manchester, New Hampshire, 81 years later.

At the time, William John Howie offered a deal. Investors were able to purchase his land and lease it to a company managed by Howey to develop and grow a citrus orchard.Howey’s company would then harvest and sell the fruit and They gave landlords a share of the profits each year.

In Howey’s eyes, this was a win-win deal. For him, he would sell the land in advance and get a steady profit for the landowner. In the eyes of the U.S. Securities and Exchange Commission, it was an unregistered investment contract and a clear violation of federal securities laws.

A legal battle and a 1946 Supreme Court decision in favor of the SEC created important new standards for determining when contracts should be considered securities and registered like stocks or bonds.

And last week, that benchmark, the “Howie Test,” overthrew the Manchester-based crypto-driven file-sharing company co-founded by a prominent New Hampshire liberal.

In its November 7 ruling, the United States District Court for the District of New Hampshire applied a 1946 precedent to rule that LBRY, a company co-founded by former U.S. Senator Jeremy Kaufman, was deemed to be registered virtual currency. I found that I was selling credit illegally. as securities.

The court ruled that LBRY was selling crypto investments under the guise of credit to access LBRY’s platform, just as Howey was selling investment contracts under the guise of selling citrus orchard land. .

The ruling could create serious financial problems for the seven-year-old company. Judge Paul Barbadro granted the SEC’s motion requesting “a waiver of all improper gains derived from the illegal conduct described herein.” This decision, absent a settlement or appeal, could seriously threaten LBRY’s future.

An eventual settlement could leave the company unable to operate the credit that powers its internal economy, losing a major source of revenue.

In an email Wednesday, Kaufman declined to comment on whether the company would appeal the decision or seek a settlement.

“We will pursue the best course of action for LBRY users and our mission to create a decentralized protocol that makes censorship impossible,” he said. “Maybe,” he added.The protocol is used by millions of people every day, the code is open source, and work continues in another way. ”

But as the company grapples with it, Kaufman and some legal experts say the ruling is also the latest in a series of aggressive actions taken by the SEC against cryptocurrency-based companies. claim. This oversight role received renewed attention last week after the collapse of his FTX, a cryptocurrency exchange that filed for bankruptcy after failing to return its users’ investments.

“The SEC v LBRY lawsuit establishes a precedent that threatens the entire US cryptocurrency industry,” Kaufman claimed in a tweet on the day of the decision. “Under this standard, almost all cryptocurrencies, including Ethereum and Doge, are securities.”

“trust” issues

Founded in 2015, LBRY created a file sharing platform that allows users to purchase and share videos and other content without corporate oversight or regulation.

The platform uses blockchain technology, a type of digital ledger that tracks asset ownership without the need for human intervention, so it can operate without central control.

Court filings on behalf of LBRY describe the service as “an alternative to centralized applications such as YouTube, which have become increasingly dictatorial in their censorship and monetization policies and processes.”

To build its platform, the company’s founders self-financed and raised “small sums” of money from angel investors and venture capital firms, according to court filings. When the platform launched in his 2016, the company also launched his credit called LBC. This is what users can purchase to purchase and upload content on the platform.

These credits are at the heart of the SEC’s lawsuit against LBRY. The SEC argued that the credit is the financial backbone of the company and serves primarily as an investment contract. I pointed to statements by Kaufman and others that pointed out that

The distinction is very important, according to University of Arkansas professor Carol Goforth, a leading US academic on cryptocurrency regulation. Cryptocurrencies such as Bitcoin do not need to be regulated as securities because their value is not tied to companies or representatives, Goforth said in an interview. But a crypto asset whose value is directly dependent on a company’s performance meets the criteria for a security, she said.

“The language the SEC used in its 2019 Framework on Digital Assets is whether there are active participants that others rely on,” Goforth said. “And in the case of LBRY, the active participants were actually the LBRY group, the group of creators of this particular token.”

However, LBRY countered that the credits were not an investment but rather a functional purpose to allow users access to the platform. The other credits were sold to help buyers support the mission of the decentralized platform, not as an investment opportunity, LBRY added in its court filing.The company said the credits were not seed investments. said. They were launched only after the platform was operational and the company was not involved in the public offering of credit.

“They waited very cautiously until it worked and they started selling it,” said Goforth. “And that was very wise. What in hindsight turned out to be unwise was publicly tying the profitability of the investment opportunity.”

“I walk around with a big target on my back, so don’t be surprised if you get shot,” she added.

Kaufman disagrees, noting that statements filed in the company’s court filings tell users not to speculate about the LBRY token.

LBRY has issued a number of statements discouraging purchases for investment purposes. However, Kaufman added, “The judge said LBRY will be a security regardless of the marketing statement.”

SEC, Congress, and the Future of Cryptocurrencies

Ultimately, Judge Barbadoro sided with the SEC. “…LBRY has made no secret in its communication with potential investors that it expects LBC to add value through its managerial and entrepreneurial endeavors,” he wrote.

Furthermore, Barbadoro has determined that the fact that the credits were actually used within the LBRY platform does not mean that the credits cannot be bought or sold as an investment.

Exactly what happens next is unknown. Barbadoro called for a situational meeting between the parties, a move that could lead to a settlement. In a tweet on Tuesday, the company referred to a “settlement offer” by the SEC, but did not comment on whether it would accept it.

For Goforth, the court ruling is the latest example of a regulatory environment that works better to punish rather than help cryptocurrency companies.

Goforth argues that the current security registration system can be unwieldy for crypto companies. In an email, Kaufman claimed that even if he wanted LBRY to register the credit as a security, the process would be as follows.Literally impossible. ”

Meanwhile, the SEC recently used the Securities Act of 1934 to take action against other crypto companies. In 2020, the U.S. District Court for the Southern District of New York ruled in favor of the SEC after it discovered that Kik, the company behind free messaging app Kik Messenger, had issued digital “Kin” tokens. was dropped. was not registered. The decision imposed a fine of $5 million and a requirement that Kik not issue tokens without registration.

According to Goforth, most SEC enforcements against crypto-related companies never go to court. The SEC’s financial power often forces small start-ups to settle.

“I can’t believe they are crypto-neutral,” Goforth said of the SEC, agreeing with Kaufman. “I also consider them relatively hostile.”

Kaufman had stronger words. “The SEC behaves exactly like the mafia. They use the power of subpoenas to threaten to cause damage, do business only over the phone, and look away when you make payments,” he said. Told.

SEC Chairman Gary Gensler has defended the regulatory action, arguing it seeks to protect investors by putting cryptocurrencies under the same rulebook as the stock market.

“There is nothing about the crypto market that is incompatible with securities law.” he said in september“Investor protection is equally important regardless of the underlying technology.”

Goforth and other academics who study cryptography say the answer is not to keep the SEC out of the process, but to support blockchain technology and pass better and more modern regulations to match it. . That would likely require legislation in Congress.

“We are looking at some suitable bills that could move things,” Goforth said. There’s a huge, huge, huge impact and the impact it will have on market stability, we haven’t seen it yet, and I think it could put more pressure on us to get a legislative solution. .”

On that point, Kaufman, a die-hard libertarian, reluctantly agrees.

“The future of cryptocurrency now rests with an organization worse than the SEC: the US Congress,” he tweeted.

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