On 3 October 2023, the U.S. Securities and Exchange Commission (SEC) filed a comprehensive legal memorandum opposing Coinbase’s Motion for Judgment on the Pleadings. The SEC’s opposition is rooted in the Howey test, a legal standard used to determine what constitutes an “investment contract.” According to the SEC, an investment contract is an arrangement where a person invests money in a common enterprise and expects profits primarily from the efforts of others.
The SEC argues that crypto assets traded on Coinbase meet this criteria. They emphasize that each crypto asset issuer on Coinbase’s platform has invited investors to expect an increase in the value of their investment, based on the issuer’s plans to develop and maintain the asset’s value. The SEC refutes Coinbase’s claim that transactions on its platform never involve “investment contracts” as defined by common law. They point out that the Howey test does not require a formal contract and that courts have often considered the existence or absence of contractual undertakings as just one of many factors.
The SEC also took issue with Coinbase’s attempts to shift the blame onto the SEC for its current legal predicament. They assert that Coinbase has been aware since 2016 that a crypto asset traded on its platform could be considered a security if it meets the Howey test. The SEC further argues that their authority to regulate securities transactions involving crypto assets is not a new power but is derived from existing federal securities laws.
In response, Coinbase’s Chief Legal Officer, Paul Grewal, took to social media platform X to counter the SEC’s claims. Grewal criticized the SEC for making sweeping legal claims without sufficient legal citations. He also stated that the assets listed on Coinbase are not securities and are, therefore, not under the SEC’s jurisdiction. Grewal pointed out that recent court decisions have clarified that the assets on Coinbase are not securities.
Grewal also criticized the SEC’s approach as ignoring the voice of the 52-million-strong crypto community in the U.S. He mentioned that founders from over 40 crypto companies have joined the “Stand With Crypto” initiative in Washington, D.C., to advocate for consumer-friendly legislation. Grewal concluded his thread by stating that Coinbase looks forward to filing its reply on 24 October 2023 and appreciates the court’s consideration of its case.
Featured Image via Coinbase