The US Securities and Exchange Commission's (SEC) lawsuit against Terraform Labs is set to proceed as the US judge overseeing the case denied the company's motion to dismiss on July 31. The judge's ruling also rejected a previous ruling by US District Judge An Alisa Torres, which had stated that Ripple's sale of its XRP did not violate securities laws when tokens were on public exchanges.
The SEC had filed charges against Terraform Labs and its founder, Do Kwon, on February 16, accusing them of orchestrating a multibillion-dollar cryptoasset securities fraud. In April, Terraform Labs' legal representatives filed a motion to dismiss the law suit, followed by supplemental materials in June. However, Judge Jed Rakoff of the Southern District of New York denied the motion to dismiss, stating that all well-defended allegations must be deemed true for the purpose of this motion, and reasonable inferences drawn must favor the SEC.
Terraform Labs had argued in previous motions to dismiss that the SEC lacked jurisdiction over the company and its founders, and that tokens like Mirror Protocol (MIR), Terra Classic (LUNC), and TerraUSD Classic (USTC) were not securities. They also cited that Congress was engaged in a debate on how to regulate cryptocurrencies and requested the SEC to wait for congressional action. However, Judge Rakoff rejected these arguments, stating that the SEC had the authority to regulate crypto tokens without congressional authorization and rejecting the "substantial issues doctrine."
The judge further analyzed the Howey test, noting that no formal contract was required to satisfy the test, and tokens themselves may be considered securities in court debates. The court also declined to distinguish between primary and secondary purchasers of tokens like MIR and LUNA, which is a departure from a recent case involving Ripple Labs Inc. In that case, another judge made such a distinction, but Judge Rakoff's ruling has not made the same differentiation, potentially benefiting Ripple in their legal battle with the SEC.
