In November 2022, U.S. District Judge Paul J. Barbadoro of the District of New Hampshire held that LBRY, Inc. had conducted unregistered offerings of securities in violation of § 5 of the Securities Act with respect to its offer of sale of its LBC token. That token was meant to be used by content creators and audience members on LBRY’s “content marketplace,” which billed itself as an alternative to YouTube. On July 11, 2023, the judge issued his Order concerning remedies.
The court held that a permanent injunction enjoining LBRY from violating Section 5 of the Securities Act was appropriate. It rejected LBRY’s argument that the injunction was unnecessary because it intended to dissolve as soon as possible, saying that the same representation had been made months earlier but the dissolution had not yet happened. However, the court also held that it agreed with LBRY that the SEC had not presented sufficient evidence to date that Odysee, LBRY’s subsidiary that runs the video platform, should be enjoined, especially in light of evidence showing that Odysee has a distinct organizational structure, operations, revenue stream, leadership, and bank account.
But the other important part of the decision concerned whether the injunction would prevent holders of LBC tokens from selling them. On this issue, the judge held as follows:
As for third-party holders of LBC, the SEC has not argued in this case that they could violate the injunction merely by purchasing or selling LBC. Indeed, the SEC has expressly stated that it “is not seeking an order prohibiting all third parties from buying or selling LBC.” . . . Given the SEC’s litigation posture, it suffices to say that merely holding LBC or purchasing it for consumptive purposes is insufficient to bring third parties within the purview of [the injunction]. Instead, third parties would need to act in concert with LBRY in order to be exposed to a risk of being held in contempt of the injunction order.
Furthermore, because the SEC did not seek relief against third-party purchasers of LBC, the court declined both LBRY’s and the amici’s invitation to rule on whether LBC is itself a security. Since that issue had not been litigated, the court took no position on whether the registration requirement applies to secondary market offerings of LBC by persons or entities that are not subject to the injunction.
With respect to the amount of the civil penalty, LBRY argued for a nominal penalty because it did not act with scienter and entered the cryptocurrency market during a time of great uncertainty as to the regulatory requirements. The SEC argued for the maximum statutory amount for a first-tier violation ($111,614) because LBRY’s unregistered offerings were egregious and continued after this lawsuit was filed. The court agreed with the SEC and said that, because LBRY’s misconduct continued after the SEC’s position on the registration requirement became clear, its violation was more egregious than a simple unregistered offering. It ordered a fine of $111,614.
LBRY responded to the Order with the following Tweet: “In accordance with the court’s order and our promises, we expect to spend the next several months winding LBRY Inc. down entirely. As to what happens to LBRY from here, well, that’s up to you.”