On June 28, 2024, in SEC v. Binance Holdings Limited, et al.1, the U.S. District Court for the District of Columbia issued a Memorandum Opinion & Order on the defendants’ motions to dismiss2 the SEC’s charges against them.
Today, we take a closer look at the Opinion, specifically the Court’s decision to dismiss the SEC’s charges related to Binance’s unregistered offer and sale of BUSD, secondary market sales of BNB, and the company’s Simple Earn program.3
BUSD
The headline is that the Court dismissed—in its entirety—the SEC’s charge that Binance offered and sold unregistered securities when it sold BUSD.
Binance marketed BUSD as a “stablecoin” which could be redeemed 1:1 for U.S. dollars. According to the complaint, Binance had an agreement with “Trust Company A” to invest BUSD reserves, that is, proceeds from BUSD sales, and evenly split revenue earned on the reserves with Binance.
The complaint does not allege BUSD holders would share in those returns in any way. So common sense would dictate no one bought it as an investment. Fortunately, the Court agreed, finding the complaint did not plausibly allege Binance offered and sold BUSD as investment contracts under the Howey test.4
The SEC argued it was not BUSD that was the security but, rather, it was the fact that BUSD was offered and sold together with the opportunity to use the token to participate in profit-making enterprises—including Binance’s “BUSD Reward Program,” “Binance Flexible Savings,” “Binance Launchpool,” and “De-Fi staking offerings”— that created the investment contract. However, the Court found, the complaint failed to allege how each of those programs satisfied the criteria for an investment contract.
In other words, this appears to have been a pleading failure, not a reason to conclude other federal courts, presented with similar facts and circumstances, will assess whether a stablecoin is a security separate and apart from profit-making opportunities it was presented alongside. A more detailed complaint may have resulted in a different outcome.
That said, in our view, the Court’s decision on the standalone stablecoin was right. After all, stablecoins involve neither an investment (that is, a commitment of capital by an investor seeking a financial return) nor, as the Court found, an expectation of profit. And additional comfort may be taken from the fact that Paxos Trust Company, LLC (Trust Company A in the complaint) recently received a termination letter from the SEC staff, stating that it will not recommend an enforcement action against Paxos in connection with its issuance of BUSD.
BNB
The Court allowed the allegations against Binance relating to its ICO and post-ICO sales of BNB to move forward, but dismissed the portion of the complaint related to secondary sales of BNB, by sellers other than Binance.
The Opinion should not be viewed as a clear statement that tokens initially sold in an ICO or otherwise as securities become non-securities by virtue being resold into the secondary market. However, the Court’s careful analysis does provide some insight in how other courts may weigh the securities law status of secondary token sales.
In dismissing the allegations of the complaint concerning secondary sales, the Court noted the tension between (a) the SEC’s claim that with respect to the ICO, BNB itself was not security, the investment contract was the manner in which Binance offered and sold BNB, and (b) its claim, with respect to secondary sales, that the token was “the embodiment of the investment contract.” The SEC appears to be arguing, the Court wrote, that the representations at the outset travel with the token, but that is different than setting forth allegations that—post ICO—Binance continued to market BNB to new buyers in a way that created an investment contract.
In short, the question presented for the Court was whether Binance marketed BNB to secondary market buyers as an investment. And, here, the Court found, the complaint did not contain sufficient allegations from which that inference could be drawn.
While allowing the charge to proceed with respect to the ICO and post-ICO sales, the Court cautioned: “That is not to say that the SEC’s own allegations, and the materials upon which they are based, do not raise questions about what will be established at the end of the day. The question as to what motivated the reasonable purchaser at the time may prove to be a close one.”
The Court found it significant that there was no lockup period for the BNB tokens Binance sold in the ICO and after, something the Telegram and Ripple courts both found relevant, and that a key selling point of BNB was that purchasers could use the token to pay platform fees, including exchange, withdrawal, listing, and other fees and, when doing so, they would receive significant discounts. The factors, the Court noted, could support a contrary finding at a later stage in the proceedings, namely, that it was the ability to use BNB to obtain discounts on the platform, not investment, that incentivized participation in the ICO.
Simple Earn
Finally, the claim against Binance concerning the Simple Earn program was dismissed, because the allegations do not describe a scheme or transaction whereby investors were urged to put their money in Binance’s hands and share in returns Binance would generate through its managerial or entrepreneurial efforts. Unlike the allegations concerning BNB Vault and the Staking Program, the Court found, Simple Earn was simply a loan by the tokenholder to Binance.
S&K OBSERVATIONS
This case is another illustration—like Telegram, Ripple, and LBRY—that the question of whether a token was offered and sold as an unregistered security is a facts and circumstance determination. And perhaps that not everything that involves staking automatically involves the creation of a security.
Federal courts grappling with these cases for the first time may arrive at different conclusions based on similar underlying circumstances. All we can do is look for commonality among the cases and ask ourselves whether some decisions are better reasoned than others, or lend themselves to broader application than others, or seem to make more sense than others, like the BUSD decision here.
1 On June 5, 2023, the SEC filed a complaint against Binance Holdings Limited, BAM Trading Services, Inc., BAM Management US Holdings, Inc. and Changpeng Zhao.
2 On September 21, 2023, BAM Trading Services, Inc. and BAM Management US Holdings, Inc. filed one motion to dismiss, and Binance Holdings Limited and Zhao filed another. The Court’s Opinion addresses both.
3 The complaint also alleges Binance operated as an unregistered securities exchange, broker-dealer, and clearing agency; and fraud, among other things, for diverting customer assets to CZ-controlled companies and engaging in wash trades to create the false appearance of liquidity. The Court permitted these charges to move forward.
4 The Howey test is generally held to require (i) an investment of money (ii) in a common enterprise (iii) with an expectation of profits based on the efforts of a promoter or third party.
