A group of legal scholars, including professors from esteemed institutions such as Fordham Law School, Yale Law School, and the University of Chicago Law, have offered insights into the Securities and Exchange Commission (SEC) lawsuit against Coinbase. They argue that the SEC’s reliance on the term “investment contract” to assert its claims conflicts with long-standing legal principles established over a century ago.
In their amicus brief, the scholars contend that the SEC’s interpretation of the term “investment contract” is more expansive than historical context suggests. They stress that their participation is not representative of their institutions but rather an endeavor to provide subject expertise to influence the outcome of the lawsuit.
The SEC’s lawsuit against Coinbase, filed in June, alleges that the exchange operates as an unregistered broker, clearinghouse, and exchange. The SEC’s case pivots on its assertion that several cryptocurrencies traded on the platform constitute unregistered securities.
The Securities and Exchange Commission (SEC) utilizes the Howey Test to evaluate if a token sale meets the criteria of an investment contract. This assessment aims to establish whether an investment entails “the placement of funds into a collective endeavor, with a reasonable anticipation of profits gained from the efforts of external parties.”
The scholars highlight the importance of the Howey Test in the broader cryptocurrency landscape, particularly in cases like the SEC’s litigation against Ripple Labs over XRP sales. While District Judge Annalisa Torres found that the sales of XRP did not fulfill the Howey Test, this reasoning was not extended to a subsequent case against Terraform Labs and Do Kwon.
The scholars challenge the SEC’s assertion that the presence of an investment contract does not necessarily require a formal contract. They argue that historical precedent contradicts this stance, pointing to decisions regarding “blue-sky laws” that influenced the Securities and Exchange Act of 1934.
They emphasize that by the time Congress enacted the Securities and Exchange Act of 1934, state courts had established a standard where an “investment contract” necessitated a contractual agreement between buyers and sellers. The Supreme Court, they contend, echoed these state-level decisions in its own rulings.
While the Howey Test’s reference to the term “scheme” has generated debate, the scholars assert that it was not intended to negate the fundamental requirement of a contractual arrangement for an investment contract to exist. They advocate for adhering to the historical understanding of the term, implying that a decision favoring the SEC in the Coinbase lawsuit would depart from established case law.
In summary, the scholars contend that an investment contract inherently involves contractual undertakings that promise future value based on a business’s income, profits, or assets, and they urge the court to uphold this well-settled definition.
