LBRY Inc., the creator of the LBRY blockchain, announced its official closure in a final community post on October 20, citing a court loss and “several million dollars in debts.”
The LBRY team took the opportunity of its final post to have a parting swipe at the U.S. Securities and Exchange Commission (SEC), describing the regulator’s chairman Gary Gensler as “Darth Gensler” and securities laws as an “antique weapon.”
“LBRY Inc. has debts to the SEC, its legal team, and a private debtor that it cannot pay. Its assets, including Odysee, are being placed into receivership,” explained the announcement. “As of this post, all LBRY executives, employees, and board members have resigned. All will be doing what is required to satisfy any outstanding legal requirements, but no more.”
After losing a case against the SEC in November 2022, in which LBRY was found to have offered unregistered securities based on the company’s issue of LBC tokens, LBRY was forced to shut down and saddled with a $22 million fine.
This was eventually reduced to just over $111,000, with the SEC acknowledging that LBRY was “defunct, ceasing operations, and without the funds to pay a larger fine.”
In September, LBRY seemingly decided to have one last swing at reversing the punishment entirely and filed a notice of appeal against the SEC. However, the company’s latest statement suggests it has now lost the will, or the funds, to continue the fight.
“It wasn’t a happy ending, but it was a happy journey,” said former CEO Jeremy Kauffman on X (formerly Twitter) on Friday.
LBRY’s blockchain is open-sourced and “decentralized,” so it will continue operating as long as people mine blocks.
What happened to LBRY?
In March 2021, the SEC charged LBRY with conducting an unregistered offering of digital asset securities in relation to a 2016-20 token offering the SEC said raised $11 million for the company. The asset the civil complaint took issue with was ‘LBRY Credits,’ or LBC.
In November 2022, a Federal Judge agreed with the SEC and ruled, in a summary judgment, that the sale of LBC tokens amounted to an unregistered securities offering.
However, the two were again back in court soon after to fight whether the sale of LBC tokens in the secondary market constituted securities violations. The SEC argued that the November ruling encompassed all LBC sales, while LBRY and LBC investors opposed this interpretation of the judgment.
In February 2023, Judge Barbadoro ruled that investors who traded LBC tokens on secondary markets didn’t violate securities laws and clarified that he would not issue an injunction to LBC traders on the secondary market.
Digital assets lawyer John Deaton, who spearheaded the LBRY/LBC side of the debate, crowed over what he saw as a monumental win and the fact that, as he saw it, he had essentially got the SEC to admit ‘on record’ during the proceeding that the underlying asset was not a security.
However, the SEC never argued the contrary, making it clear in a court filing that “the Commission is not seeking an order prohibiting all third parties from buying or selling LBC.”
The question in the Howey test, which is used to determine whether an asset sale can be classed as a securities offering, is not actually a debate about whether the underlying asset is a security, but rather, if the offering of the asset amounts to an investment contract, and therefore a securities offering. It is the investment contract, which is a security.
Therefore, Deaton’s over-hyped victory was, in reality, just a minor victory for sellers of LBC on the secondary market, not for anyone trying to claim the buying and selling of LBC did not amount to securities offerings.
Either way, the end result is that LBRY Inc. had to close down its operations for violating securities law and, as of Friday, no longer exists. The now-defunct company’s blockchain remains for the time being.
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