On March 29, 2021, the U.S. Securities and Exchange Commission charged LBRY, a blockchain company, with conducting an unregistered offering of digital asset securities. According to the SEC’s complaint, from at least July 2016 to February 2021, LBRY, which offers a video sharing application, sold digital asset securities called “LBRY Credits” to numerous investors, including investors based in the U.S. The complaint alleges that LBRY did not file a registration statement for the offering, and that the offering failed to satisfy any exemption from registration. The complaint further alleges that by failing to file a registration statement, LBRY denied prospective investors the information required for such an offering to the public. As alleged, LBRY received more than $11 million in U.S. dollars, Bitcoin, and services from purchasers who participated in its offering.
The SEC’s complaint, filed in the federal district court in New Hampshire, charges LBRY with violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The SEC seeks permanent injunctive relief, disgorgement plus prejudgment interest, and civil penalties.
LBRY has responded by launching a website called helpsavecrypto.com, where the first words on the landing page say, “The claims made in SEC vs. LBRY would destroy the United States cryptocurrency industry.” LBRY says that it does not believe that the LBRY Credit is a security subject to SEC regulation.
The FAQ section of the website discusses the lawsuit. LBRY says that the SEC assertion that LBRY Credits have no use other than speculation contradicts the facts and history of experience on LBRY. They say that the LBRY Credit serves an integral function in its network. It allows individuals to create an identity, tip creators, and publish, purchase, and boost content in a decentralized way. Millions of people have used it this way, and were using it well before any tokens were sold to anyone. LBRY also states that, despite LBRY being used by millions of people, to its knowledge, not a single person has alleged harm or damage as a result of purchasing LBRY Credits.
One section of the FAQ explains why this case is unusual compared to others brought by the SEC. It says:
- The SEC is not alleging fraud.
- LBRY Inc conducted no Initial Coin Offering (ICO).
- LBRY Inc did not breach any fiduciary duties.
- LBRY Inc at no time indicated that LBRY Credits were an investment, and consistently discouraged purchasing Credits for this purpose.
- LBRY Inc did not sell any tokens until after they could be used on a functional network, a previously stated key element by the SEC in how they assess token transactions.
LBRY asserts that the implications of the lawsuit “are extremely dire for the blockchain and technology industry in the United States.” In its view, under the standard being applied by the SEC, every blockchain technology that is actively developed faces existential threat, so long as that development is either funded by a token holder, even if indirectly, or if the developers themselves hold the token.
According to the website, LBRY has been under investigation for three years and has already spent more than $1 million on legal fees.