Shalini Nagarajan

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 <a href="https://www.courtlistener.com/docket/59774584/107/us-securities-and-exchange-commission-v-lbry-inc/" target="_blank" rel="noreferrer noopener">filing</a> 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 <a href="https://www.docketalarm.com/cases/New_Hampshire_District_Court/1--21-cv-00260/US_Securities_and_Exchange_Commission_v._LBRY_Inc/1/" target="_blank" rel="noreferrer noopener">lawsuit</a> 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 <a href="https://blockworks.co/news/no-ico-is-no-excuse-lbry-ruling-shows-bad-news-for-ripple">secured victory in the case</a> 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. <a href="https://www.courtlistener.com/docket/59774584/100/us-securities-and-exchange-commission-v-lbry-inc/" target="_blank" rel="noreferrer noopener">hit back</a> 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.&nbsp;



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

Casey Wagner

SEC Chair Gary Gensler, who has <a href="https://blockworks.co/news/gensler-crypto-wild-west">long hinted</a> that he believes most crypto tokens are securities, finally confirmed his view that everything other than bitcoin falls under the SEC’s purview, and it’s giving crypto firms fuel for their legal battles.&nbsp;



In a Feb. 23 interview with New York Magazine, Gensler confirmed what the industry has long expected: “Everything other than bitcoin” is a security, he said.&nbsp;



In response to the comment, Ripple and LBRY, two firms who found themselves going head to head with the agency over this exact issue, are calling the agency chief’s behavior out as prejudiced. <a href="https://blockworks.co/news/ripple-sec-final-briefs-provide-case-summary">Ripple’s fight with the SEC</a> is ongoing.



Gensler needs to recuse himself from all crypto enforcement action votes going forward, Ripple’s chief legal officer Stuart Alderoty <a href="https://twitter.com/s_alderoty/status/1630345920398147588?s=20" target="_blank" rel="noreferrer noopener">argued</a>. Alderoty cited the precedent established by Antoniu v. SEC, a case in which the SEC’s attempt to ban a stockbroker from working at a securities firm fell apart because a SEC commissioner had prejudged the case in a public statement.



In Antoniu, the plaintiff claimed that the commissioner’s participation in disbarment proceedings “impermissibly tainted the proceedings with the appearance of impropriety” and the court agreed, holding that the statements demonstrated that the commissioner &#8220;in some measure adjudged the facts as well as the law of a particular case in advance of hearing it.&#8221;



The court further stated that, “Accordingly, we nullify all Commission proceedings…in which Commissioner Cox participated occurring after Commissioner Cox&#8217;s speech was given and remand the case to the Commission with directions to make a de novo review of the evidence, without any participation by Commissioner Cox.”



If this precedent were to apply to Gensler’s speech, he may be prohibited from participating in future securities cases brought against digital asset firms.



The counter argument to Antoniu v. SEC is that although the commissioner in question recused himself from the proceedings after his speech, he did “participate in a routine denial of an offer of settlement,” University of Kentucky Law faculty wrote in a 2009 <a href="https://uknowledge.uky.edu/cgi/viewcontent.cgi?referer=&amp;httpsredir=1&amp;article=1318&amp;context=law_facpub" target="_blank" rel="noreferrer noopener">opinion</a>. The commissioner&#8217;s actions “did nothing to violate the well-settled prejudgment doctrine about which the court writes,” faculty added. Their analysis, however, did not set a precedent.



LBRY, the issuer behind LBC Credit Tokens, also spoke up about Gensler’s NY Magazine comments, claiming the company knew Gensler’s opinion all along.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">People called us crazy for saying that the SEC thought everything other than Bitcoin was a security, but now Gensler is saying it publicly. <a href="https://t.co/Q9wFjIsNH7">pic.twitter.com/Q9wFjIsNH7</a>&mdash; LBRY 🚀 (@LBRYcom) <a href="https://twitter.com/LBRYcom/status/1630692141419712513?ref_src=twsrc%5Etfw">February 28, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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The situation comes after LBRY was handed down a summary judgment in November, which ruled in the SEC’s favor and confirmed LBC is a security. In a small win for LBRY, and potentially Ripple, in a January appeal, a judge <a href="https://blockworks.co/news/lbry-vs-sec-secondary-sales-arent-securities-may-be-good-news-for-ripple">clarified that secondary sales of LBC are not considered securities</a>.



LBRY has publicly <a href="https://twitter.com/LBRYcom/status/1617978599101042688?s=20" target="_blank" rel="noreferrer noopener">offered</a> its help to other crypto agencies facing legal challenges with the SEC, saying it will share any information it can into the process and best practices when confronting enforcement actions.&nbsp;



A summary judgment in Ripple’s case over the classification of its XRP is expected this year. The legal proceedings began in 2020.



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Impermissibly Tainted? Gensler’s Own Words Could Bar Him From Crypto Securities Actions

A judge clarified that LBRY Credit Tokens, known as LBC, are only considered securities at the time of direct sale, a ruling that could potentially bode well for Ripple.&nbsp;



During an appeal hearing in New Hampshire Monday, the judge said the <a href="https://blockworks.co/news/no-ico-is-no-excuse-lbry-ruling-shows-bad-news-for-ripple">summary judgment</a> <a href="https://blockworks.co/news/no-ico-is-no-excuse-lbry-ruling-shows-bad-news-for-ripple">handed down in November</a>, which sided with the Securities and Exchange Commission (SEC), does not apply to secondary sales of LBC.&nbsp;



The SEC sued LBRY in March 2021 for offering LBC tokens without registering with the agency. Although the LBRY team did not offer tokens to the public in an <a href="https://blockworks.co/tag/ico">initial coin offering</a> (ICO) or similar mechanism, they did keep tokens for themselves in a ‘pre-mine,’ which were subsequently released on secondary exchanges to fund operations, the SEC alleged.



In the summary judgment, the judge argued that the tokens incentivized the team to build the network, suggesting to investors that LBC would be a profitable investment on the secondary market.&nbsp;



“LBRY has — at key moments and despite its protestations — been acutely aware of LBC’s potential value as an investment,” the <a href="https://odysee.com/@lbry:3f/secvslbrysummaryjudgementruling:a" target="_blank" rel="noreferrer noopener">summary judgment</a> reads. “And it made sure potential investors were too.”&nbsp;



Monday’s ruling may be a positive sign for Ripple, which is facing its own SEC lawsuit over its XRP tokens, which the regulator alleges were distributed in an unregistered security offering.&nbsp;



Ripple has maintained that it never formally held an ICO, similar to the LBRY situation.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Ripple never held an ICO because the XRP ledger was ALREADY in existence when Ripple was formed. So, prior lawsuits against companies that held ICOs do NOT tend to show that Ripple had Fair Notice that what it was doing was illegal. Ripple is making an important distinction here.&mdash; Jeremy Hogan (@attorneyjeremy1) <a href="https://twitter.com/attorneyjeremy1/status/1401990980836986892?ref_src=twsrc%5Etfw">June 7, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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The case will be decided in a summary judgment, which both Ripple Labs and the SEC agreed to in November 2022. 



In a small win for Ripple, the judge on the case ruled in September that the “<a href="https://blockworks.co/news/sec-emails-highlighting-alleged-conflict-of-interest-set-to-take-center-stage-in-ripple-trial">Hinman documents</a>,” emails between former SEC officials regarding ether’s classification, are permissible evidence.



In April 2022, Empower Oversight, a nonprofit whistleblower organization, released more than 200 emails, including Hinman’s, obtained via Freedom of Information Act request between current and former SEC employees.&nbsp;



The group claimed the emails prove there were conflicts of interest associated with how the SEC selected enforcement actions against digital asset companies, specifically the agency’s decision not to view ether the same as XRP.



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