Legal briefs supporting Coinbase flood in, pressuring SEC

Several amicus briefs have already been filed this year, hoping to bolster Coinbase’s fight against the regulator

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Legal scholars, venture capitalists and blockchain advocates each filed amicus briefs on Friday, joining existing calls to bolster Coinbase’s ongoing defense against the US Securities and Exchange Commission.

The briefs argue the SEC’s interpretation of an “investment contract” is fundamentally flawed and inconsistent with established law. They also warn a ruling in favor of the regulator could have far-reaching implications for the crypto industry.

Several amicus briefs have already been filed this year, including from the US Chamber of Commerce, which accused the regulator of “causing substantial economic harm to both Coinbase and the broader business community.”

In June, the SEC filed a lawsuit against publicly-traded Coinbase, accusing the exchange of failing to register with the agency. The suit also alleges that Coinbase did not ensure that digital assets sold on its platform were exempt from the definition of securities under the Howey test.

The regulator contends certain digital tokens meet the definition of investment contracts, as they provide investors with a “reasonable expectation of profits derived from the efforts of others.” As such, the regulator believes many digital assets fall under its purview.

Legal experts argue that the SEC’s interpretation is too broad and could encompass a wide range of assets that are not currently considered securities, including commodities, collectibles as well as traditional stocks and bonds. 

They also argue that the SEC’s focus on the “efforts of others” factor as defined by Howey is misplaced, as many digital assets are not dependent on those efforts for their value.

Echoing previous sentiments this year, top US law scholars from institutions including Yale, Chicago, UCLA, Fordham, Boston and Widener called on the court Friday to examine if tokens traded on platforms like Coinbase can be considered unregistered securities.

The central issue hinges on whether these instruments are defined as such within the Securities Act of 1933 and the Exchange Act of 1934.

“In interpreting the term ‘investment contract’ in federal securities laws, the court should adhere to the settled meaning of the term,” they said, adding that the conventional reading entails a contractual agreement that grants an investor a share of profits, income or assets.

They argue that for an arrangement to be an investment contract, there must be an expectation of profit or a stake in the business’s income, profits or assets. 

Various Supreme Court cases have applied and refined this principle, already examining whether an offering fits the common understanding of a security, they said. 

Some arrangements, such as shares in a non-profit housing cooperative, were found not to be investment contracts, while others, like payphone sale-leaseback schemes, were deemed securities. 

Previous court ruling decisions emphasize the investor must be promised an ongoing interest in the enterprise’s future profits or assets, they said.

Senator Lummis

Jenner & Block attorneys filed a brief on behalf of US Senator Cynthia Lummis, R-Wyo., late Friday, in which she expressed concerns about the SEC’s overreaching authority. 

The senator contends the SEC’s pursuit against Coinbase violates the constitution’s separation of powers and hampers congressional attempts to oversee crypto. 

Senator Lummis argues the current legal framework is insufficient to address crypto assets, necessitating new laws that align with prior legislative initiatives. 

As a prominent figure in crypto asset policy, Lummis, in collaboration with Sen. Kirsten Gillibrand, has recently put forward the Responsible Financial Innovation Act, underlining the urgency for well-integrated legislation.

Andreessen Horowitz and Paradigm

Andreessen Horowitz and Paradigm, venture capital firms with substantial investments in technology and crypto startups, also expressed their concerns about the potential broader implications of the SEC’s approach.

They warned the SEC’s broad interpretation of “investment contract” might place excessive burdens on both mature companies and budding startups, possibly leading to greater legal complexity and compliance costs, stifling innovation and obstructing companies’ capacity to raise capital through token sales.

Both firms emphasized the need for clear and consistent regulatory guidelines. Paradigm recently filed a separate brief in the SEC’s lawsuit against former Coinbase executive Ishan Wahi citing similar reasons.

“A new regulatory framework for this emerging and novel technology is indispensable,” the firms said. “But such a framework should originate from Congress, rather than an agency stretching its statutes and regulations beyond established limitations.”

The firms expressed apprehension that the SEC’s current approach may create uncertainty and inconsistency in applying securities laws to digital assets, leading to a loss of investor and entrepreneur confidence.

Blockchain advocates

Simultaneously, the Crypto Council for Innovation filed a joint amicus brief with the Blockchain Association, Chamber of Progress and the Consumer Technology Association.

Like, Andreessen and Paradigm, the advocates emphasized the SEC’s application of the definition of investment contracts for digital assets could lead to ambiguity and hinder innovation.

They expressed concerns that the regulator’s overreach in defining investment contracts might inhibit future entrepreneurial initiatives, particularly in the technology and digital sectors.

Citing the major questions doctrine, they stressed that an agency should not claim powers that Congress has explicitly withheld, emphasizing that significant policy decisions with considerable economic and political effects must be made by Congress, not administrative agencies.

The major questions doctrine is a principle within US administrative law that defines the limits of an administrative agency’s authority. It stresses that agencies must not independently make rulings on important policy issues that could have wide-reaching economic and political consequences.

Instead, a well-defined and meticulously tailored definition is crucial to maintaining market stability and fostering a climate that encourages growth, innovation, and investment in emerging technologies, the parties argued Friday.


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