- Coinbase has filed a brief requesting an interlocutory appeal in the SEC case on whether an investment contract requires a post-sale obligation.
- The interlocutory appeal is the latest move by Coinbase in its bid to secure legal clarity after the SEC denied its last request for clear guidelines for itself and the rest of the industry.
Cryptocurrency exchange Coinbase has filed a new brief to the New York Southern District Court, seeking approval for an interlocutory appeal in its SEC case. The appeal request, dated April 12, aims at gaining clarity on the question of whether the SEC has the authority to regulate, as an investment contract, digital asset transactions that don’t require any post-sale obligations from purchasers.
Announcing the filing on X (formerly Twitter), Coinbase’s Chief Legal Officer Paul Grewal said the filing for appeal came earlier than normal because “it’s critical to our industry.”
“The SEC’s action against us and other digital asset companies goes way beyond the legal authority granted by Congress and puts an unjust cloud over US digital asset innovation,” wrote Grewal.
Coinbase had last year, filed a motion to dismiss the SEC’s lawsuit that it engaged in unregistered sales of securities. The exchange insisted that “transactions over Coinbase’s platform and Prime are not, and do not involve, contractual undertakings to deliver future value reflecting the income, profits, or assets of a business.”
However, last month, the SEC secured a win over Coinbase’s motion to dismiss with US District Judge Katherine Polk Failla ruling that the regulator’s case about Coinbase engaging in unregistered sales of securities was valid and should be heard before a jury. Failla’s ruling stated that “the challenged transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years.”
Coinbase’s filing for an interlocutory appeal intends to dispute the SEC’s position on whether the alleged trades the exchange was charged for facilitating were really investment contracts. To sufficiently counter the SEC’s position, the exchange seeks to get an answer “whether an “investment contract” can exist absent any post-sale obligation.”
The filing highlighted that “in the 90 years since the federal securities laws were enacted, neither the Supreme Court nor the Second Circuit has ever found an investment contract without a post-sale obligation.” However, the bone of contention is that the SEC in its recent enforcement actions against the cryptocurrency industry, “has advanced the theory that no such obligation is required.”
Coinbase also related the failure of the Howey Test to provide an explicit framework for determining digital asset transactions that constitute investment contracts, considering that the SEC itself had to seek an interlocutory appeal in the Ripple case to resolve how the test applied to such transactions.
A review of the case by a second circuit court of appeals will solve the lingering issue of how the Howey Test applies to digital assets and ease district courts of their struggles to provide a viable decision on such a significant matter with divergent views. Additionally, if Coinbase finally gets a favorable appeal on the “investment contract” question, it could dismiss a bulk of the SEC’s case.