Crypto Airdrops Are Not Securities, Lawsuit Against SEC Argues – Decrypt

The crypto industry is clapping back at U.S. regulators with a pre-emptive lawsuit against the Securities and Exchange Commission (SEC), spotlighting its aggressive enforcement of securities law. 

On Monday, the DeFi Education Fund (DEF) filed a lawsuit in a Texas federal court against the SEC, arguing that Beba, a Texas-based apparel company, did not violate U.S. securities laws by airdropping its BEBA crypto token to customers for free. 

The suit seeks a court order officially declaring Beba’s airdrop legal, potentially protecting other airdrops like it from SEC litigation.  

“Beba has engaged and plans to engage in a course of activity that is, in fact, compliant with securities law but that SEC policy has declared unlawful,” the DEF wrote in a Texas District Court filing. 

Beba hasn’t actually been sued by the SEC but is pre-emptively invoking the Declaratory Judgment Act. The law permits a party to seek legal recourse before suffering damages if they reasonably believe they will be subject to unjustified enforcement actions. 

Going on the offensive marks a shift for the crypto industry, which has historically played defense against sporadic SEC lawsuits filed against companies and projects without warning. 

“It certainly is a change in strategy for us,” Amanda Tuminelli, DEF’s Chief Legal Officer, told Decrypt. 

Key to DEF’s approach in filing Monday’s lawsuit is an accusation that the SEC has violated the Administrative Procedures Act (APA) by creating unofficial, internal policies about crypto without disclosing them publicly. 

The SEC has repeatedly maintained that crypto-specific rules at the agency are not needed, and that regulators are only enforcing existing securities laws, which it says plainly apply to many crypto offerings. 

“They definitely have a policy that they are using to bring all these actions and send subpoenas and do investigations,” Tuminelli said. “Because they’ve adopted that policy behind closed doors and refused to write it down, that is a violation of the APA.”

Last month, also in a Texas federal court, a group of prominent crypto companies, including Coinbase and Andreessen Horowitz, sued the SEC, claiming the agency does not have jurisdiction over much of the crypto industry. The suit marked one of, if not the first, proactive legal actions against the federal regulator over its crypto policies. 

The SEC has been aggressively pursuing legal action against crypto companies for years. So why are crypto firms only now opting for offensive lawsuits?

“It is not easy to find people who want to sue the SEC,” Tuminelli said. “Who are like, ‘Yes! Let me put myself right in the SEC’s crosshairs and risk them knowing who I am!’”

But at this point, the risks for companies like Beba that utilize crypto tokens might be so evident that any tactical advantage might be worth attracting the SEC’s ire pre-emptively.  

History shows that the SEC has targeted crypto firms similar to Beba in the past;  in 2018, it sued Tomahawk Exploration LLC for the promotion and distribution of “Tomahawkcoins,” despite the firm never having never raised any money. In 2022, the agency sued the Hydrogen Technology Corporation for distributing free “Hydro” tokens for marketing purposes and creating a secondary market. 

According to DEF, such distributions can’t be called securities transactions because they involve no investment of money from counterparties—a central tenant to the SEC’s Howey Test, which is used to identify investment contracts. 

In recent months, free airdrops have taken crypto by storm, raising billions of dollars for companies and projects—despite initially dropping tokens to users for free, unlike the legally vulnerable and now-outmoded practice of initial coin offerings (ICOs). 

In a message to Decrypt, University of Kentucky law professor Brian L. Frye said that DEF has made a “solid case” that airdrops fall outside of the SEC’s jurisdiction. 

In the past, Frye has criticized crypto firms like Coinbase for underestimating how broad the SEC’s authority is based on Howey, but he believes DEF’s claims around airdrops are better reasoned. 

By contrast, he thinks the fund’s efforts to prove the SEC violated the APA might have more of an uphill battle.

“The SEC isn’t claiming to make a new rule for crypto, but regulating under its existing authority, as interpreted by the Supreme Court in Howey,” Frye explained. “You don’t need notice and comment when you can make your case to the court.”

Edited by Ryan Ozawa.

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• Source: https://decrypt.co/223310/crypto-airdrops-are-not-securities-lawsuit-against-sec-argues