Coinbase (NASDAQ: COIN) has filed its long-expected motion to have the Securities and Exchange Commission’s (SEC) case against it thrown out. The largest digital asset exchange in the U.S. argued that the regulator had overreached in its lawsuit and that the assets supposedly in violation do not classify as securities.
The SEC is accusing Coinbase of operating as an unregistered securities exchange, broker, and clearing agency in violation of the Exchange Act and the Securities Act. The regulator’s lawsuit, filed June 6, also accused the exchange of failing to register the offer and sale of its digital asset staking-as-a-service program.
In response, Coinbase’s August 4 motion, known as a ‘Judgement on the Pleading,’ was filed with the United States District Court for the Southern District of New York and argued that the subject matter of the SEC’s complaint “falls outside the agency’s delegated authority.”
“The SEC may pursue this enforcement action only if relevant transactions in the digital assets and services identified in the Complaint are ‘investment contracts’ and therefore ‘securities,'” claimed the exchange. “Because as a matter of law none of them are, the claims must be dismissed.”
Coinbase claimed that transactions in the 12 tokens identified by the SEC in its complaint, which included SOL, ADA, SAND, and VGX, “are asset sales, with the obligations of buyer and seller discharged at the point of sale”—and thus not investment contracts under the definition of the Howey test.
Howey, Coinbase argued, provides that an investment contract should “at least purport to grant the purchaser a contractual right to the profits, income, or assets of a business enterprise.” According to the exchange, these are rights the tokens/assets in question do not carry.
In concluding the 38-page document, Coinbase was keen to point out that it supports and proactively seeks additional regulation for the digital asset industry. However, under the current regulation, “the SEC has overstepped its statutory authority, and the case should accordingly be dismissed.”
The SEC’s response is due within 60 days of Coinbase’s filing and will likely expand on a previous summary of its opposition sent to the judge after the exchange signaled back in June that it would attempt to have the case dismissed.
The case so far
The SEC initially filed the lawsuit on June 6, but it didn’t take Coinbase long to announce that it would attempt to dismiss the case. On June 28, Coinbase officially notified the court that it planned to request a ‘judgment on the pleadings,’ asking the court’s permission to do so.
On July 7, the SEC sent a letter to the judge in response to Coinbase’s notice. While the regulator took “no position” on the notice itself, it did state that if the judge allowed Coinbase to proceed with its motion, the regulator intended to oppose it.
The SEC also gave a summary of what its opposition to the proposed motion would be.
“Ignoring more than 75 years of controlling law under Howey, Coinbase attempts to construct its own test for what constitutes an investment contract from pre-1933 Blue Sky laws based on common law contracts principles,” the regulator stated.
The SEC also addressed Coinbase’s intention to cite the ‘major questions doctrine’ as part of its defense.
“Coinbase misapprehends the purpose and reach of the major questions doctrine,” the SEC said. “The doctrine is rooted in “separation of powers concerns” and constrains agencies’ “regulatory assertion[s]” of authority…This case, by contrast, involves the SEC’s exercise of its longstanding authority to enforce statutory requirements.”
The major questions doctrine, as the Supreme Court named the principle, states that in “extraordinary” cases involving matters of great “economic and political significance,” federal agencies cannot regulate without specific Congressional authorization.
Ripple Labs, and several of its supporters, attempted to use this argument in its case against the SEC, suggesting that in its jurisdictional overreach, the regulator was in conflict with the major questions doctrine. The argument appeared again in the SEC’s insider trading case in Seattle federal court against former Coinbase employee Ishan Wahi and was argued by Coinbase in an Amicus Curiae brief.
In its July 7 letter, the SEC signaled it would dispute any claim that it is making rules up on the fly, lacking a mandate to do so, and therefore shouldn’t regulate the industry until more legislation is passed.
On July 12, Coinbase responded, insisting that it should be allowed to make a case for dismissal.
After an initial pre-trial and pre-motion conference on July 13, Coinbase was allowed to go ahead with its motion for judgment on the pleadings, with both parties agreeing to an August 4 date for Coinbase’s opening brief.
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