- The SEC’s case against LBRY, a decentralised file-sharing service, concluded Tuesday.
- A federal judge again sided with the SEC, imposing most of the penalties recommended by the regulator.
- But the judge declined to say whether the token at the heart of the lawsuit, LBC, is a security, frustrating the crypto community.
LBRY should have apologised.
In a 12-page order Tuesday, a federal judge barred the decentralised file-sharing service from future offerings of unregistered securities and levied a $111,000 fine — in part because LBRY never “acknowledged the unlawfulness of the conduct.”
LBRY founder Jeremy Kauffman took to Twitter to protest the judge’s order.
‘I’d respect the American government if it had a rule of law.’
“I’d respect the American government if it had a rule of law,” he wrote. “It does not, so I don’t and won’t respect it, nor will I apologise.”
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Kauffman did not return a request for comment.
The order concludes a months-long legal battle between LBRY and the Securities and Exchange Commission. The SEC alleged LBRY had conducted an unregistered securities offering when it sold its LBC tokens to raise money.
In November, the judge, Paul J. Barbadoro, of the District of New Hampshire, sided with the SEC. The only remaining question was the severity of the penalty LBRY faced.
In his Tuesday ruling, Barbadoro again took the regulator’s side, imposing most of the penalties recommended by the SEC.
“Although LBRY’s actions did not involve fraud, its violations were nonetheless more egregious than a mere unregistered offering,” he wrote.
Not only did LBRY sell LBC to early investors, but it served as a market maker for the token, was aware of its value as an investment, and “made sure potential investors were too.”
LBRY was also likely to continue breaking the law in the future, Barbadoro said, pointing to LBRY’s “unregistered offering,” which “persisted in some form even after the lawsuit was filed and the SEC’s position on the registration requirement became clear.”
“At no point has LBRY acknowledged the unlawfulness of the conduct,” Barbadoro wrote.
As a result, LBRY is barred from offering unregistered securities in the future, and will pay a penalty of more than $111,000, the highest for a securities violation that doesn’t involve fraud.
“The penalty is also necessary to deter LBRY and others from conducting unregistered offerings,” Barbadoro wrote.
LBRY and others in the industry had asked the judge to rule on whether LBC was a security — something he declined to do in Tuesday’s order, citing the fact the SEC had not attempted to litigate that specific question in court.
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As such, secondary sales of LBC will not be considered securities offerings, Barbadoro wrote.
That he declined to rule on the issue frustrated some in the industry.
“People generally expect the punting to continue as long as possible,” Erich Dylus, an independent attorney who has advised DAOs, told DL News. That, he continued, “gives importance to the Coinbase suit and their major questions doctrine arguments.”
‘As to what happens to LBRY from here, well, that’s up to you.’
The SEC sued Coinbase last month, alleging many of the tokens users could buy and sell on its platform are unregistered securities. In its defence, Coinbase has relied on a newly formulated Supreme Court doctrine stipulating that, in “extraordinary” situations, federal agencies cannot issue new regulations on matters of “economic and political significance.”
There was one point on which the judge didn’t side with the SEC, however.
Barbadoro denied the SEC’s request for an injunction prohibiting LBRY subsidiary Odysee from selling unregistered securities.
But he also refused LBRY’s request that Odysee be permanently protected from such an injunction, leaving the door open to future SEC action should Odysee itself sell its LBC holdings.
In a Twitter post Tuesday, LBRY reiterated its promise to shut down.
“We expect to spend the next several months winding down LBRY Inc. entirely,” it wrote to its followers. “As to what happens to LBRY from here, well, that’s up to you.”
As a decentralised platform, the LBRY protocol can continue operations even after the company itself folds. One user, independent tech journalist Naomi Brockwell, replied to the company’s farewell with a promise to continue uploading videos to LBRY — “a decentralised, censorship-resistant home for our content,” she wrote.