Even if LBRY had never said a word about the LBC token, Judge Barbadoro found that the LBC token would constitute a security because LBRY retained hundreds of millions of LBC tokens for themselves, thus signaling to investors that it was committed to working to improve the value of the token. Critically, however, Judge Barbadoro found that even if LBRY had made none of these statements, the LBC token would still constitute a security because “any reasonable investor who was familiar with the company’s business model would have understood the connection” between LBC value growth and LBRY’s efforts to grow the use of its network. Most important to his conclusion that investors purchased LBC tokens with the expectations of profits solely through the efforts of the promoter (i.e., LBRY) were: the many statements made by LBRY employees and community representatives about the price of LBC and trading volume of LBC and many statements that LBRY made about the development of its content platform, including how the platform would yield long-term value to LBC holders. Applying the Howey test, Judge Barbadoro noted the only prong of the Howey test that was disputed in the case was: Did investors buy LBC tokens “with an expectation of profits to be derived solely from the efforts of the promoter or a third party”? Judge Barbadoro answered resoundingly, “Yes.” Judge Barbadoro concluded as a matter of law (i.e., that no reasonable jury could conclude otherwise) that the LBC tokens were securities under Section 5 of the Securities Act. LBRY spent about half of the 400 million LBC tokens on various endeavors, such as direct sales and using the tokens to incentivize software developers and software testers. At launch, LBRY had pre-mined 400 million LBC for itself, and approximately 600 million LBC would be available in the future to compensate miners. LBRY offered and sold LBRY Credits, called LBC tokens, that would compensate participants of their blockchain network and would be spent by LBRY users on things like publishing content, tipping content creators, and purchasing paywall content. LBRY is a company that promised to use blockchain technology to allow users to share videos and images without the need for third-party intermediaries like YouTube or Facebook. 3 For FinTech companies hoping to avoid SEC enforcement actions, the LBRY decision strongly suggests that all companies offering digital assets could be viewed by courts as satisfying the Howey test for investment contract securities. 1 This case is seen by some as a canary in the coalmine in that the decision supports the SEC’s view espoused by SEC Chairman Gary Gensler that nearly all digital assets are securities that were offered and sold in violation of the securities laws. 2 in a case watched by companies that offered and sold digital assets. Federal District Court Judge Paul Barbadoro recently granted summary judgment for the Securities and Exchange Commission (“SEC”) against LBRY, Inc.
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