A pre-motion hearing set to take place on July 13 between the Securities and Exchange Commission (SEC) and crypto exchange Coinbase should provide a sense of the litigation tone and its potential impacts on the broader crypto industry, legal sources told Cointelegraph.
Previously scheduled for August, the conference is a typical request presented by any party seeking a ruling on a specific matter prior to the trial. In this case, the motion was requested by Coinbase in late June. The exchange wants Judge Katherine Polk Faila to dismiss the complaint filed by the regulator on June 5.
As the first hearing between the parties, the conference will likely be “procedural and administrative heavily”, explained Mark Kornfield, securities and regulatory attorney. “Coinbase will try to position this case as one that is ripe for early dismissal on any number of grounds. Including that the tokens are not securities under the Howey test and thus the commission is overstepping its jurisdictional authority,” Kornfield added.
In its reply to the motion on July 7, the SEC made strong criticisms of the exchange, including that it was aware of possible violations of securities laws, and it is deliberating “ignoring more than 75 years of controlling law under Howey” in an attempt “to construct its own test for what constitutes an investment contract.“
Coinbase’s motion also refers to its initial public offering in 2021. According to the exchange, the SEC is now seeking charges for activities “exhaustively described” to the regulator and the general public in the past years.
Although the SEC was aware of Coinbase’s business activities, the claim could not be enough to win a case in court. According to corporate and securities lawyer Roland Chase, the federal securities laws governing the “going public” process are disclosure-based. “All that the SEC is authorized to do by Congress is to review the going public documents and provide comments and ask questions in an effort to improve the company’s disclosure to potential investors,” Chase told Cointelegraph.
Chase also noted that to go public, Coinbase reported to the SEC that it would subject each asset to a comprehensive legal analysis before allowing it to trade on its platform to ensure securities are not traded. “The SEC eventually got comfortable with all this disclosure and cleared Coinbase to go public,” he explained, adding that the SEC “now thinks that Coinbase is, in fact, trading securities on its platform. In addition, it thinks that Coinbase is offering its own unregistered securities.”
Without an agreement between the parties, the case may take years to be resolved. A well-known example is Ripple’s legal battle that has been dragging on since 2020 when the SEC also deemed that its token XRP was a security. In a recent video about the ongoing litigation, Ripple CEO Brad Garlinghouse said the SEC has “knowingly created confusion about the rules, and they used that confusion through enforcement.”
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