684 F.Supp.3d 170
S.D.N.Y.2023Background
- Terraform Labs (Singapore) and founder Do Hyeong Kwon developed UST (an algorithmic stablecoin pegged to $1) and companion token LUNA, plus related products (wLUNA, MIR, mAssets), and launched the Anchor and Mirror Protocols.
- Terraform marketed high-yield returns (Anchor: advertised ~19–20%) and promoted ecosystem growth to U.S. investors via conferences, meetings, social media, and retained U.S.-based personnel; large volumes of UST/LUNA were sold or loaned to U.S. entities.
- The SEC alleges defendants artificially propped UST’s $1 peg in May 2021 via a secret U.S. trading firm purchase and misrepresented real-world utility (e.g., purported Chai integration), then UST/LUNA collapsed in May 2022, wiping out billions.
- SEC filed suit asserting securities fraud (Securities Act §17(a); Exchange Act §10(b)/Rule 10b‑5), unregistered offering/sales (Section 5), security‑based swap violations re: mAssets, and control-person liability under §20(a).
- Defendants moved to dismiss for lack of personal jurisdiction and failure to state claims (Major Questions/APA/Due Process challenges to SEC authority; Howey applicability; pleading/particularity issues).
- Court denied the motion in full: found a prima facie basis for U.S. personal jurisdiction, rejected Major Questions/notice/APA bars, and held the Amended Complaint plausibly alleges the tokens/protocols are securities and that fraud and registration claims survive pleading-stage challenges.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Personal jurisdiction | Terraform purposefully directed offers/sales/marketing and contracted with U.S. firms; prior 2d Cir. opinion supports U.S. contacts | Marketing was global and not purposefully directed at the U.S.; prior decision not dispositive | PJ: denied motion — SEC alleged extensive U.S. contacts, contracts with U.S. firms, and Second Circuit precedent supports jurisdiction |
| Scope of SEC authority / Major Questions, APA, Due Process | SEC may treat particular crypto-assets as securities under existing law and guidance; enforcement is fact‑specific | Doctrine/APA/Due Process bar SEC from asserting tokens are securities without rulemaking or prior clear notice | Rejected — Major Questions inapplicable, SEC provided adequate industry notice and uses longstanding Howey framework; APA rulemaking not required for fact-intensive enforcement |
| Whether tokens are securities (Howey) | Tokens + protocols/representations created a common enterprise and led investors to expect profits from defendants’ efforts | Tokens are standalone commodities/stablecoins, not investment contracts; secondary-market purchases differ | Held: Amended Complaint plausibly pleads Howey elements (common enterprise; reasonable expectation of profits tied to defendants’ efforts); tokens sold or used in protocols survive dismissal |
| Registration and security-based‑swap claims (Section 5; mAssets) | Sales/loans to U.S. entities and listing agreements supported unregistered public distributions; mAssets transfer financial risk like security-based swaps | Sales were exempt or through subsidiaries; mAssets not swaps | Held: SEC pled facts supporting unregistered distributions and necessary‑participant role; defendants did not carry exemption burden; mAssets plausibly characterized as security‑based swaps |
| Fraud (Chai integration; May 2021 de-peg) | Defendants made materially false/misleading statements about Chai use and concealed third‑party rescue of UST peg, with motive and access to information | Statements truthful or immaterial; no duty to disclose third‑party rescue | Held: Fraud pleadings meet Rule 9(b) particularity and allege scienter plausibly (misstatements identified, benefits alleged, Kwon’s access/role alleged) |
Key Cases Cited
- SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (establishes test for “investment contract” — investment + common enterprise + profits from others’ efforts)
- Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985) (personal jurisdiction requires purposeful availment; foreseeability standard)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for pleadings)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (Iqbal pleading standards for factual plausibility)
- Util. Air Regul. Grp. v. EPA, 573 U.S. 302 (2014) (Major Questions doctrine principles)
- West Virginia v. EPA, 142 S. Ct. 2587 (2022) (Major Questions doctrine applied to transformative agency action)
- FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000) (limits agency reach in significant regulatory domains)
- SEC v. Edwards, 540 U.S. 389 (2004) (broad reach of securities laws to novel instruments)
- Revak v. SEC Realty Corp., 18 F.3d 81 (2d Cir. 1994) (horizontal commonality and pooling for common enterprise)
- SEC v. Telegram Grp. Inc., 448 F. Supp. 3d 352 (S.D.N.Y. 2020) (analyzing tokens with their attendant contractual frameworks under Howey)