• Terraform Labs has filed a response to the SEC’s litigation against it, arguing that its Singapore-registered entity and Do Kwon are not subject to its jurisdiction as non-US residents
  • The firm also argued that it doesn’t issue securities itself, rather its software allows others to do the minting and thus issuance

Terraform Labs (TFL) has responded to the SEC’s case against it and its founder Do Kwon arguing that they are both outside of their jurisdiction, Kwon was improperly served by a process server, and the software itself isn’t in the business of issuing securities because of its open source nature.

At the crux of the issue is whether the SEC has the legal authority to sue foreign nationals. In the docket, TFL argues that as a Singapore registered entity — and Kwon, a South Korean national residing in Singapore — they are not subject to US law.

“By statue, the SEC cannot serve administrative subpoenas outside the United States,” the docket reads.

Initially, Kwon denied being served by the SEC at the Mainnet Conference in New York before court filings in October said otherwise. Kwon said that, when asked about the incident, he was unaware that the SEC’s courier was in fact attempting to serve process in New York, and he was not trying to deceive journalists.

“I don’t feel like we lied…Right when we walked off stage, that’s when we were asked the question and then, as we were given the packet right before I was about to walk on stage, I wasn’t entirely sure what had happened at that point in time,” Kwon told Coindesk.

TFL and Kwon maintain that these subpoenas were improperly served and thus invalid.

Lawyers for TFL argue in the docket that the Court should discard these served subpoenas because the SEC already knew that TFL and Kwon were represented by counsel. Rule 150(b) of the SEC’s Rules of Practice, the lawyers argue, prohibit SEC staff from serving investigative subpoenas on an individual who is represented by counsel without seeking special permission to do so, which the Commission apparently did not do.  

“The SEC essentially claims the equivalent of harmless error on the theory that it “served” TFL and Mr. Kwon’s counsel with courtesy copies after the fact,” TFL’s lawyers wrote. “This ignores the function of securing jurisdiction, which the SEC had not previously done, that lawful service addresses.”

SEC and Foreign Jurisdiction

The question over whether Kwon and TFL were properly served changes the dynamics of the case. Should the Court agree with the argument that improper service was conducted, it would be a significant setback for the SEC as if Kwon does not return to the US and remains abroad it would be impossible to serve him again.

But as Blockworks has previously reported, should the Court disagree with this argument and maintain that the service was valid, the SEC has a supranational mandate.

“Whilst the SEC’s regulatory perimeter is not infinite, it is nonetheless quite broad, and exercises authority over securities transactions that occur in or are directed towards the US,” Preston J. Byrne, partner at Anderson Kill, previously told Blockworks in an interview.

“Even though a project may be based principally overseas, projects wanting to remain outside of the American regulatory perimeter and avail themselves of the Regulation S exemption need to take great pains that they don’t engage in directed selling efforts into the US.”

Regulation S, as Byrne mentioned, is a series of rules that clarifies how securities offered outside the US do not need to be registered with the SEC.

“If you’ve got a foreign company issuing securities or trading securities that are all offshore and the purchasers of those securities are all offshore, then the SEC should not really have any hook to go after them, but if any kind of a prong of a securities transaction touches the US, then the SEC generally views itself as having jurisdiction,” Daniel Payne, fintech and blockchain attorney at Murphy and McGonigle, also told Blockworks in a previous interview.

Does Terraform Labs issue securities?

The next question that the response from TFL addresses is whether the company actually sells securities in the first place.

TFL’s lawyers argue that the firm does not sell mAssets — synthetic derivatives of other assets on the Mirror Protocol app — it only has created software that allows for others to mint said assets.  

“Users mint or claim them from the protocol, and TFL earns no revenue from users’ activity,” their lawyers write. “This front end activity merely allows access to the underlying decentralized protocol which TFL does not control.”

The lawyers also point out that TFL’s own terms of service say that US residents are prohibited from purchasing mAssets in the first place. They also argue that even if some US residents accessed TFL’s website it doesn’t show the “purposeful availment” of soliciting US customers.

“Because websites are equally accessible everywhere, the mere availability of the site to users in New York, standing alone, does not amount to transacting business in the state,” TFL’s lawyers write, citing prior caselaw from Royalty Network Inc. v. Dishant.com, LLC, a case regarding the “purposeful attempt to take advantage of the New York market” from a national online advertising campaign.

Gabriel Shapiro, General Counsel for Delphi Labs, which is not involved in this case, pointed out on Twitter that the SEC has yet to explain how creating software which enables others to mint tokens is the same as selling and issuing securities.

“These topics hint at the really critical issues with ‘regulating DeFi’.  Even though decentralization is not yet perfect, it dispenses with trusted intermediaries, is peer-to-peer and puts power into the people’s hands. It mostly does not fit with current regulations,” he tweeted.

Terraform’s Luna token is set to open the US trading week down about 1% at $77.30, after reaching a new all-time high early Monday, according to CoinGecko, while the Mirror Protocol is down approximately 5%.

There has yet to be a trial date set for the lawsuit between TFL and the SEC.


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  • Blockworks
    Reporter
    Sam Reynolds is a Taipei-based reporter, covering digital assets and regulation throughout Asia. Before joining Blockworks he was an editor at Forkast News and an analyst with IDC.