No ICO is No Excuse, LBRY Ruling Shows — Bad News For Ripple?

In a move that could have serious repercussions for Ripple and other cryptocurrency companies, a federal judge has ruled crypto startup LBRY completed an unregistered security offering when it sold LBC, the protocol’s native token. 

The summary judgment, which prevents the case from moving to trial, puts a tentative end to LBRY’s legal battle started last year. 

The SEC sued LBRY in March 2021 for offering the tokens without first registering with the agency. Although the LBRY team did not offer tokens to the public in an Initial Coin Offering (ICO) or similar mechanism, they did keep tokens for themselves in a ‘pre-mine’, which were subsequently released on secondary exchanges to fund operations.

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

“LBRY has — at key moments and despite its protestations — been acutely aware of LBC’s potential value as an investment,” the summary judgment filed Monday reads. “And it made sure potential investors were too.” 

The judgment cites Reddit threads where LBRY’s community manager told potential investors the token could be “worth something in the future.” It also claims that the token has both consumptive and investment uses — the latter making it a security, as it falls foul of the Howey Test.

The Howey Test, which determines what qualifies as an “investment contract” subject to securities laws, has been a hot topic in the crypto industry as the SEC ramps up its enforcement actions against projects and tokens. Monday’s news is not terribly surprising, Mike Selig, council at Willkie Farr and Gallagher LLP, said.

“The summary judgment opinion lends support to the SEC’s longstanding view that a very narrow band of cryptoassets are outside the scope of the federal securities laws based solely on the grounds that the tokens have consumptive use (or utility),” Selig said.

What could this mean for Ripple’s landmark SEC case?

The ruling could be particularly bad for other companies or organizations that are closely associated with utility tokens, including Ripple, which is currently fighting its own legal battles over the XRP token (down 3.3% in the past 24 hours), and projects such as Filecoin (FIL), Selig said. Ripple’s offering was also not an ICO, which, based on Monday’s judgment, may no longer be a sound defense. 

“The SEC has made its position on ‘utility tokens’ clear through dozens of enforcement actions over the past five years,” he said.

“The great irony of the SEC’s enforcement actions against utility token projects is that they’ve pushed the crypto industry in a positive direction towards decentralization,” he added. 

When the SEC sued LBRY, the protocol argued it was not given fair notice and due process, a point Monday’s judge swiftly dismissed. 

“In pressing this argument, LBRY has abandoned any broad claim that it lacked fair notice of the way in which the Howey test applies to digital tokens in general,” the judgment reads. 

LBRY acknowledged the setback but could opt to appeal Monday’s ruling, in which case the parties may battle it out in trial.