A pre-motion hearing scheduled to take place on July 13 between the Securities and Exchange Commission (SEC) and crypto exchange Coinbase should give a sense of the tone of the litigation and its potential impact on the broader crypto industry, the legal sources told Cointelegraph.
Previously scheduled for August, the conference is a typical request presented by any party seeking a decision on a specific matter before trial. In this case, the motion was requested by Coinbase in late June. The exchange wants Judge Katherine Polk Faila to dismiss the complaint filed with the regulator on June 5.
As the first hearing between the parties, the conference is likely to be “very procedural and administrative”, explained Mark Kornfield, securities and regulatory attorney. “Coinbase will attempt to position this case as one ripe for early dismissal on any number of grounds. Including that the tokens are not securities under the Howey test and thus the commission is overstepping its jurisdiction authority,” Kornfield added.
In its response to the motion on July 7, the SEC made strong criticisms of the exchange, including that it was aware of possible violations of securities laws, and that it planned to “ignore more than 75 years of controlling law under Howey” in attempting “to create its own test for what constitutes an investment contract.”
Coinbase’s motion also refers to the initial public offering in 2021. According to the exchange, the SEC is currently seeking charges for activities that were “properly described” to the regulator and the general public in previous years.
Although the SEC is aware of Coinbase’s business activities, the claim is not enough to win a court case. According to corporate and securities attorney Roland Chase, the federal securities laws that govern the process of “going public” are based on disclosure. “All the SEC is allowed to do by Congress is to review public documents and provide comments and questions in an effort to improve company disclosure to potential investors,” Chase told Cointelegraph.
Chase also noted that when going public, Coinbase reported to the SEC that it would subject each asset to a comprehensive legal analysis before allowing it to be traded on its platform to ensure that securities are not traded. “The SEC eventually became comfortable with all of this disclosure and cleared Coinbase to go public,” he explained, adding that the SEC “now thinks that Coinbase is, in fact, trading securities on its platform. Furthermore, it think that Coinbase offers its own unregistered securities.”
If there is no agreement between the parties, the case may take years to resolve. A well-known example is Ripple’s legal battle that has been going on since 2020 when the SEC also considered its token XRP to be a security. In a recent video about the ongoing litigation, Ripple CEO Brad Garlinghouse said the SEC “knowingly created confusion about the rules, and they’re exploiting that confusion through enforcement.”
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