A United States Securities and Exchange Commission lawsuit against Terraform Labs is set to go ahead after a U.S. judge overseeing the case denied the firm’s motion to dismiss on July 31.
In handing down the order, the judge also rejected a July 13 decision from U.S. District Judge Analisa Torres, who ruled that Ripple did not violate securities laws by selling its XRP (XRP) token on public exchanges.
The SEC first filed a suit against Terraform Labs and its founder, Do Kwon, on Feb. 16, alleging them of “orchestrating a multi-billion dollar crypto asset securities fraud."
In rejecting the defendants’ motion to dismiss, Judge Jed Rakoff of the Southern District Court of New York found that:
“For purposes of this motion, all well-plead allegations must be taken as true, and all reasonable inferences therefrom must be drawn in the SEC’s favor.”
In its previous dismissal motion, Terraform Labs’ representatives argued that the SEC lacks jurisdiction over both the company and its founder. It also pushed back against the agency’s position that tokens including Mirror Protocol (MIR), Terra Classic (LUNC) and TerraUSD Classic (USTC) are securities.
It also argued that “Congress is not only engaging in robust debate over how crypto should be regulated, it is asking the SEC to wait for Congress to act.”
However, Judge Rakoff rejected the argument that the SEC lacked the authority to regulate crypto tokens without Congressional authorization, rejecting Terraform's objection that cited the “Major Questions Doctrine."
Newsflash: Ripple Decision Already in (Big) Trouble— John Reed Stark (@JohnReedStark) July 31, 2023
SDNY District Judge Jed Rakoff today allowed the SEC to go forward with its case against Terraform Labs and founder Do Kwon. In doing so, Judge Rakoff specifically rejected the distinction made in the Ripple case between public… pic.twitter.com/JZZ8vukfFt
The judge also devoted several pages to an analysis of the Howey test. The judge noted that no formal contract is necessary to meet the test, and tokens themselves may be considered tokens in arguments before the court, Rakoff wrote.
The court also declined to “draw a distinction between these coins [MIR and LUNA] based on their manner of sale.” Therefore:
“The Court rejects the approach recently adopted by another judge of this District in a similar case, SEC v. Ripple Labs Inc. […] Howey makes no such distinction between [primary and secondary] purchasers.”
That approach — that XRP was a commodity when sold on the secondary market — was a partial win for Ripple. Its rejection here could bode well for the SEC, if other judges follow Rakoff’s example.