One of the issues that we, and much of the rest of the crypto community, have been following for many years is the battle between the crypto industry and the SEC on the issue of whether crypto assets are securities.  In November 2022, a federal district judge in New Hampshire held that the LBRY token was a security.  On July 13, 2023, a federal district judge in the Southern District of New York ruled that Ripple Labs’ token, XRP, was a security when sold to institutional investors and not a security when sold to retail investors.  And, now, on December 28, 2023, Judge Rakoff in the Southern District of New York held that that various crypto tokens sold by Terraform are securities.

The court’s decision was grounded in the decades-old Howey test, from SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Judge Rakoff declined the defendants’ invitation to scrap the Howey test as “dicta” from a bygone era.  He then held that there was no genuine dispute that the elements of the Howey test — “(i) investment of money (ii) in a common enterprise (iii) with profits to be derived solely from the efforts of others”– were met for the following tokens: UST, LUNA, wLUNA, and MIR.

UST is a stablecoin and Defendants argued that it could not meet the Howey test because there was no expectation of profit.  But the court pointed out that UST holders could deposit their tokens in the Anchor Protocol, which Defendants’ efforts developed and which they publicly announced would generate “by far the highest stablecoin yield in the market,” with a “target” of “20% fixed APR.”  Thus, UST in combination with the Anchor Protocol constituted an investment contract.

With respect to LUNA (and wLUNA), the court said Terraform founder Do Hyeong Kwon and others made specific, repeated statements that would lead a reasonable investor in LUNA to expect a profit based on Defendants’ efforts to further develop the Terraform blockchain.  For example, Terraform’s business development lead, Jeff Kuan, stated in a 2021 public interview that “investing in Terra means . . . buying LUNA, which is the ‘equity’ in our co.” The court noted that, in Kwon’s own words, a holder of LUNA could simply, “[s]it back and watch [him] kick ass.”   In other words, a person could, in the language of Howey, invest their “money in a common enterprise” and be “led to expect profits solely from the efforts of the promoter or a third party,” namely, Terraform.

As to MIR, the court noted that Terraform described MIR as a “governance token that earns fees from asset trades” on the Mirror Protocol that Terraform launched.  Kwon himself sent promotional materials to a potential MIR purchaser, including a spreadsheet with a revenue projection table estimating how the price of MIR would increase as a result of greater usage of the Mirror Protocol.  The court also pointed to the fact that Terraform also described to potential investors its efforts to strengthen the Mirror Protocol, such as “deploying its UST reserves to make the markets for mAssets for the first year of the protocol,” building the Mirror Protocol website and hiring a firm to audit Terraform’s code for doing so, and publishing “dashboards” showing the Mirror Protocol’s growth.  The court held that “in light of all this, defendants cannot meaningfully dispute that they led holders of MIR to expect profit from a common enterprise based on Terraform’s efforts to develop, maintain, and grow the Mirror Protocol.”

After holding that the Howey test was satisfied, the court granted summary judgment in favor of the SEC on its count IV — for defendants’ unregistered offers and sales of LUNA and MIR.  The court rejected the defendants’ argument that an exemption from registration applied because their distributions of LUNA and MIR were not public offerings, as they only sold directly to sophisticated investors.  The court said that Terraform’s own repeated statements about developing a liquid secondary market for these tokens made plain that neither Terraform nor its institutional investors had any intent to simply hold onto LUNA or MIR without further trades.

The SEC has quite obviously viewed this decision as a big victory.  Indeed, on January 3, 2024, in each of  the SEC’s ongoing cases against Coinbase and Binance, the SEC sent a Notice of Supplemental Authority alerting these other courts to Judge Rakoff’s decision, which it said resolved in the SEC’s favor a number of issues similar to those raised in the other cases. 


David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.