The U.S. Securities and Exchange Commission (SEC) is pursuing yet another case of a blockchain company allegedly selling unregistered securities.
The securities regulator is seeking a permanent injunction against LBRY from selling further tokens in addition to a disgorgement of "ill-gotten gains" plus prejudgement interest.
The SEC says the securities were sold in the form of LBRY Credits (LBC), which were communicated to investors as being used to fund LBRY's business and build its product, according to the document.
LBRY is an open-sourced protocol allowing participants to post content without fear of retribution. The SEC says LBC tokens were sold as investment contracts in exchange for U.S. dollars and other non-monetary contributions.
The network has solicited help from the cryptocurrency community, claiming the industry is at risk while simultaneously saying its credits are not securities.
"The SEC complaint against LBRY reflects an outdated view of the economy that stifles innovation, accessibility, and creativity," LBRY's CEO Jeremy Kauffman told CoinDesk via email. "Under the overreaching standard set by the SEC complaint, most blockchain tokens would be deemed securities, leaving uncertainty and confusion in the industry."
Kauffman added the SEC's complaint fails to acknowledge steps taken by his company to comply with the law and its efforts to conduct its business in a "forthcoming and transparent way."
Of particular note in the SEC document and brought to attention in a tweet by crypto lawyer Grant Gulovsen are allegations LBRY enlisted a vendor to use 40 million LBC from its institutional fund to act as a market maker (MM).
The MM operated as a middleman to buy and sell LBC on a "regular and continuous" basis at prevailing market prices. The SEC alleges this activity provided an air of credibility that the platform was capable of generating a profit.
Stemming from the initial coin offering (ICO) craze in 2017, the SEC has been clamping down on cryptocurrency and blockchain businesses it claims are operating outside of U.S. securities law by selling unregistered products to vulnerable investors.
UPDATE (March 30, 2021, 2:40 UTC): Includes comments from LBRY CEO Jeremy Kauffman
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.