SEC Lowers LBRY Fine Significantly Due to ‘Near-Defunct’ Status

SEC revises LBRY’s fine due to the startup’s lack of funds and withdraws disgorgement requests

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Comdas/Shutterstock, modified by Blockworks

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The Securities and Exchange Commission (SEC) sought to revise its fine against blockchain-based content-sharing platform LBRY after taking into account the marketplace’s inability to afford the substantial $22 million penalty.

Additionally, considering LBRY’s “lack of funds and near-defunct status,” the agency chose to withdraw its request for disgorgement, or forfeiture of ill-gotten gains.

In a filing dated May 12, the Commission has now requested the US District Court of New Hampshire to impose a fine of $111,614.

In March 2021, the SEC filed a lawsuit against LBRY, accusing them of offering LBRY Credit tokens (LBC) without registering them as securities. LBRY CEO Jeremy Kauffman expressed concern this decision could potentially endanger the entire US crypto industry, as it would establish a precedent that could classify “almost every cryptocurrency” as security.

Although LBRY did not conduct an initial coin offering (ICO) or a similar public token sale, the SEC alleged that LBRY’s team retained tokens for themselves through a “pre-mine” process and subsequently released them on secondary exchanges to generate funds for their operations.

The SEC secured victory in the case through a summary judgment in Nov. 2022, when a federal judge recognized that the tokens incentivized LBRY’s team to develop the network, creating the perception among investors that investing in LBC on secondary markets would yield profits.

LBRY in Dec. hit back at the SEC’s request for $22 million in disgorgement, saying the amount was “not a reasonable approximation of profits causally connected to the violation.”

Now, the SEC has also sought an injunction to prevent LBRY from violating Section 5 of the Securities Act of 1933, which prohibits unregistered offerings of crypto securities. This injunction will continue until LBRY meets two requirements: disposing of its LBC holdings and dissolving the company, as it has expressed intent to do in court.

The SEC argued that LBRY’s possession of LBC tokens indicates the potential for additional unregistered sales, which supports the necessity of an injunction.

“LBRY satisfies the factors for injunctive relief and there is a reasonable likelihood it will violate Section 5 again,” the agency said. Blockworks has reached out to LBRY for comment. 

Meanwhile, LBRY contended in Dec. 2022 that an injunction is unnecessary since it’s already in the process of shutting down operations and burning existing LBC tokens, according to the filing. The SEC pointed out that these actions have not been taken yet.


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