Earlier this year, the U.S. Securities and Exchange Commission filed a lawsuit against Gemini, a New York-based crypto exchange, over an unregistered security offering. Jack Baughman, a founding partner of JFB Legal, said Gemini is seeking to dismiss the lawsuit, highlighting the fact that the SEC has failed to identify the security in question.
"The SEC is floundering," Baughman said in an Aug. 18 post on X, formerly Twitter. "They can’t even decide what the security is. On the one hand, they claim that the Loan Agreement was a security. On the other hand, they claim that the entire Gemini Earn program was itself a security — an argument absurd on its face."
A memo filed Aug. 18 with the Southern District of New York in support of Gemini's motion to dismiss the lawsuit said the SEC failed to identify both the security and the supposed sale or offering of the security.
The memo said that, under the Securities Act, it is "unlawful to sell (or offer to sell) an unregistered security...Thus, to make out its case, the SEC must do two things. First, it must identify the unregistered security. Second, after it has identified such security, it must identify the sale or the offer to sell...However, the SEC has not met that burden, and its opposition avoids the question before the court...the fact that the SEC cannot decide what is the security at issue only underscores the weakness of its position."
The memo said that, even if the SEC did identify the security, "it has not plausibly alleged that such security was ever sold or offered for sale."
The memo suggested several simple questions the court could have asked the SEC, such as "When was the alleged security sold? Who was the buyer?"
"The SEC has no answers to these questions, and the Complaint makes no non-conclusory allegations on any of these points," the memo said. "Accordingly, plaintiff has failed to state a claim."
Referring to another recent case in which a district court judge ruled a digital asset was not a security when sold to members of the general public, Gemini CEO Tyler Winklevoss said in a July 13 post on X.
"The Ripple ruling today confirms that the @SECGov and @GaryGensler are not the regulator of crypto," Winklevoss said on X.
In 2020, the SEC accused blockchain developer Ripple of offering the token XRP as an unregistered security, while Ripple argued that XRP was not a security, according to Investopedia. On July 13, the district court ruled that, when sold to members of the public, XRP is not a security. The court determined that when XRP is sold to institutional investors, it does qualify as a security.
Stuart Alderoty, the chief legal officer of Ripple Labs, said in a July 25 episode of TechCrunch's Chain Reaction podcast, that the judge's decision could be relevant to other ongoing litigation, including the SEC's lawsuits against crypto exchanges Binance and Coinbase.
"The core allegation — both in the Coinbase lawsuit and in the Binance lawsuit — that an exchange trading a digital token would therefore need to register as a national security exchange — that was repudiated by this judge in our case," Alderoty said in the podcast. "We have a clear statement that the trading of a digital token — in this case XRP, but I think you can analogize to other tokens — that does not make a contract for an investment, and therefore there's no security, and therefore there's no role for the SEC to play. I think that ruling will play well in the Coinbase case, and it should play equally well on that claim in the Binance case."