SEC Claims Digital Asset LBRY Is Unregistered Security

Crypto currencies began life with the idea of “being off the grid.” Later at least some versions claimed to be part of the grid. As crypto mutated over time regulators struggled with how to handle the new investments, trying to fit possibly new idea into existing laws administered by a variety of agencies such as the SEC and the CFTC. Ultimately, the SEC concluded that in some instances the new investments were securities. That occurred when they met the three part definition of an investment contract established decades ago by the Supreme Court in Howey. The CFTC concluded that the coins are a commodity. While these categories seem to be fairly well established, new iterations arise such as the digital assets LBRY Credit at issue in SEC v. LBRY, Inc., Civil Action No. 1:21-cv-00260 (D.N.H. Filed March 29, 2021).

Defendant LBRY, Inc. is a privately owned firm based in Manchester, New Hampshire. It was created in 2015 to distribute digital content. It began with video distribution as a possible competitor for YouTube, Amazon and other video platforms.

To move forward with its vision LBRY claimed it would use blockchain technology by: 1) creating a “protocol” or set of rules for the transfer of data between devices; 2) create a user application; 3) make the necessary software to enable the protocol; 4) recruit those necessary to make the videos; and 5) attract consumers. To support these efforts the firm proposed to sell LBC – LBRY Credits.

The financing effort began in March 2016 with an announcement on the company website about the program. By June 2016 the firm launched its protocol having designed the first 400 million LBC in its possession. This constituted 40% of the total allowable supply under the protocol.

The LBC were then divided into three funds: The Operational Fund; the Community Fund; and the Institutional fund. Each fund was used slightly differently to achieve the overall goal. For example, the Community Fund focused on consumers; the Institutional Fund looked to institutions for partnerships, grants, donations and similar matters; and the Operational Fund looked to profit.

Beginning in 2016 the company offered LBC from the Community Fund in exchange for contributions to the network. Subsequently, at various points over a three-year period beginning in 2017, LBC from each of the other funds were offered to investors. Those investors purchased LBC in return for U.S. currency, bitcoin or other consideration such as services. The reason for the purchases was an expectation of profits from the pooling of their funds with others. The profits would come from the efforts of Defendant.

Following these transactions LBRY has continued to sell LBC. About 10 million LBC were sold to retail investors. In late June the firm took steps to stabilize the price of LBC which varied significantly. In October 2020 the company represented on its website that LBC will only gain value as the use of its Network grows. Efforts to deliver on the promises made to investors continued in March 2021.

The LBC are not registered with the Commission. The complaint alleges violations of Securities Act Sections 5(a) and 5(c). The case is pending. See Lit. Rel. No. 25060 (March 29, 2021).

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