Slip Opinion
S.D.N.Y.2022Background
- Plaintiffs are U.S. investors who bought nine digital tokens (EOS, QSP, KNC, TRX, FUN, ICX, OMG, LEND, ELF) on Binance and allege those tokens were securities rather than utilities.
- Plaintiffs allege Binance listed, promoted, and profited from token trading (listing fees and trade percentages) beginning in 2017; issuers sold tokens in ICOs and Binance facilitated secondary trading.
- Plaintiffs claim they only learned the tokens were securities on April 3, 2019, when the SEC issued its Framework for Investment Contract Analysis of Digital Assets; suit was filed April 3, 2020.
- Causes of action: Section 12(a)(1) of the Securities Act, Section 29(b) of the Exchange Act, and state Blue Sky claims (based on trades allegedly placed from five jurisdictions).
- Defendants moved to dismiss; the court granted the motion, dismissing the Second Amended Complaint on statute-of-limitations and extraterritoriality grounds and denying oral argument.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Timeliness of Securities Act §12(a)(1) claims | §12’s one-year bar should be tolled by a discovery rule; accrual waited until SEC Framework (Apr 3, 2019) | §12(a)(1) contains no discovery rule; limitations runs from the violation date | Claims untimely; §12 has no discovery rule and many token purchases occurred >1 year before suit |
| Whether Binance is a “statutory seller” under §12(a)(1) (solicitation or passing title) | Binance solicited token purchases and controlled transfers via platform, making it a statutory seller | Plaintiffs fail to plead solicitation within the year or sufficiently allege passing title to buyers | §12 claims based on solicitation/time barred; allegations insufficient to show timely statutory seller conduct |
| Timeliness of Exchange Act §29(b) claims (discovery rule) | §29(b)’s one-year discovery rule means accrual when SEC Framework clarified tokens are securities (Apr 3, 2019) | Plaintiffs knew or reasonably could have known of the unregistered-exchange issue earlier; Framework did not disclose new critical facts | §29(b) claims untimely—plaintiffs knew the exchange was unregistered earlier; Framework is a nonbinding interpretation and did not delay accrual |
| Extraterritoriality / Domestic-transaction requirement for federal and state claims | Binance had U.S. contacts (AWS servers, English website, U.S. employees) and plaintiffs bought tokens while in the U.S., so transactions are domestic | Mere routing through U.S. servers and other contacts insufficient; transactions did not incur irrevocable liability or pass title in the U.S.; Binance is not a domestic exchange | Claims dismissed as extraterritorial. Federal securities laws apply only to domestic transactions/exchanges; Blue Sky claims likewise fail for lack of nexus and extraterritoriality |
Key Cases Cited
- Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010) (federal securities laws focus on domestic transactions; limits extraterritorial application)
- S.E.C. v. W.J. Howey Co., 328 U.S. 293 (1946) (Howey test for what constitutes an investment contract)
- Pinter v. Dahl, 486 U.S. 622 (1988) (definition of a "statutory seller" and solicitation standard under §12)
- Rotkiske v. Klemm, 140 S. Ct. 355 (2019) (refusal to impose a judicially created discovery rule when statute does not provide one)
- Rotella v. Wood, 528 U.S. 549 (2000) (discovery-rule accrual: claim accrues when plaintiff learns critical facts of injury and actor)
- Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) (domestic transaction test: irrevocable liability or title passage in the U.S.)
- City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173 (2d Cir. 2014) (foreign exchange purchases on foreign exchanges are not domestic transactions)
- In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347 (2d Cir. 2010) (interpretation of who qualifies as a statutory seller under §12)
- In re Bibox Grp. Holdings Ltd. Sec. Litig., 534 F. Supp. 3d 326 (S.D.N.Y.) (similar dismissal of crypto securities claims; rejected discovery-rule tolling)
- Pompano-Windy City Partners, Ltd. v. Bear Stearns & Co., Inc., 794 F. Supp. 1265 (S.D.N.Y. 1992) (requirements for relief under §29(b), including privity and illegality of contract)