Thread by @JohnEDeaton1

A SYNOPSIS OF THE @SECGov 🆚 @LBRYcom SUMMARY JUDGMENT TRANSCRIPT.

As I said during @CryptoLawUS’s livestream after watching the SEC 🆚 LBRY Summary Judgment argument below is my single biggest criticism and observation along with direct quotes from the hearing.

The Judge 👨‍⚖️ asked the SEC’s lawyer:

“Do you concede that there is what I think LBRY is calling a consumptive use for #LBC?”

SEC Lawyer:

“We do, your honor. Not for the entire time of the offering.”

The COURT:

“When does something that has a consumptive use and that LBRY would say is a commodity shade into a security?”

SEC Lawyer:

“Well, your Honor, I first would say you don’t start with the presumption that something is a commodity. You apply the Howey test first.”

The COURT:

“I think it’s undeniable that people are acquiring #LBC for investment reasons. I think it’s undeniable that people are acquiring #LBC for consumptive reasons. How do I determine in a case where some investors are acquiring for consumptive and some are for investment?

The COURT continues:

“How do I determine whether in that case it meets the first component of the third element of the Howey test?”

SEC Lawyer:

“Your Honor, I agree it is a tricky problem not fully addressed by the law.”

SEC Lawyer continues:

“And in fact there’s a third possibility, which is what if someone buys a thousand #LBC wanting to spend 10 and hold onto 990.”

The SEC lawyer then began to argue that the token purchaser’s subjective intent is not important.

The SEC lawyer goes on to say whether the token has utility is NOT important.

The SEC lawyer said:

“I think it comes out can a reasonable purchaser expect to profit. IT’S NOT DO THEY. It’s can they.”

THE COURT:

“I agree it’s not do they. I agree it’s can.”

THE COURT gave a hypothetical:

“If …we could nail down…that 75% of #LBCs were used and bought for consumptive purposes, people realized that there are also promotion of this for investment, and 25% were buying b/c of investment, would that make it expectation of profits?”

The SEC lawyer responded by arguing the percentage of those buying for consumption (users) 🆚 those buying for investment doesn’t matter. He said:

“What’s happening here is you can buy this thing. You can wait. LBRY can continue to develop its network and it will be more.”

The SEC lawyer continues:

“Therefore, whether or not I want to take part of it and spend it on my cat 🐈‍⬛ videos, it’s still expectation of profits if I am a reasonable purchaser. Can a reasonable purchaser expect profits as opposed to what is the reasonable purchaser’s intent.”

The SEC lawyer continues:

“It doesn’t matter that there’s a utility. Because there was a utility in the oranges 🍊 and the whisky 🥃 casks and the chinchillas and all the other cases that come along in the Howey chain. THE UTILITY DOESN’T MATTER.”

The LBRY lawyer argued basically that the judge should adopt a “principal” standard. In other words, if #LBC tokens were acquired principally for consumption and use it isn’t a security. He gave an example of @naomibrockwell as someone who built a business utilizing the platform.

As you can see from the SEC’s lawyer’s argument, the SEC believes utility is irrelevant. According to the SEC’s argument, even if 100% of the purchasers intended to use the token, if it CAN be held that a reasonable purchaser COULD also expect price appreciation, its a Security.

Again, my extreme criticism regarding the LBRY lawyer’s argument is that he did not give the judge a way to split the baby and find for both the SEC and for LBRY.

One of the Judge’s first questions to the SEC lawyer was when does a commodity turn into a security.

I was expecting the LBRY lawyer to flip that question and tell the judge that the relevant question is when does a security transform into a commodity.

Hinman’s entire speech on #ETH is about that very fact. Clayton agreed w/ the premise that a token can start out as a security but later be a commodity. @HesterPeirce’s entire Safe Harbor is premised on that belief.

The judge even stated to the LBRY lawyer “what about when there were only 4 videos on the platform to review?”

But that was day one when LBRY became live. There are today over 15 million videos to review and 1.3 million users per day.

I realize it may come off in poor taste to Monday morning quarterback and be overly critical of another lawyer. I’m not the best lawyer and I know I’ve made my mistakes. But that was a glaring mistake and very concerning because of how the SEC will spin a potential win.

I have to go back and review LBRY’s written summary judgment to see if the transformation argument is sufficiently addressed. Maybe it is and the LBRY lawyer believed he didn’t need to raise it at oral argument. I hope that’s the case b/c an all or nothing approach is bad.

The other issue for me was that the fair notice defense (FND) wasn’t argued at oral argument. The judge commented that it was well briefed but he gave the parties an opportunity to highlight issues. Both sides declined.

I would’ve argued the #LBC token meets the standard articulated in Hinman’s speech better than #ETH does and that @LBRYcom relied on it. I know when I interviewed @jeremykauffman on @CryptoLawUS TV he said his team did a PowerPoint presentation on the speech and how #LBC met it.

The judge is likely to decide fair notice isn’t a defense. The @Ripple XRP case is in the 2nd Circuit and has the Upton case as precedent, LBRY doesn’t. There’s a reason the SEC didn’t move to strike the FND in LBRY as it did against Ripple.

The SEC expects to win 🆚 the FND in LBRY and then run to Judge Torres saying look how it was struck down. The truth is the SEC is expecting a win 🆚 LBRY. But its really not about LBRY - its about getting the #LBC token declared a security to use against all of crypto.

Think about it. 🤔

Who is LBRY hurting. It raised a couple hundred thousand dollars. With all the fraud and pump and dump schemes to go after, they go after little ass LBRY for a few hundred thousand? The SEC wants the win for what it means symbolically and politically.

I tried to get attention to this case long ago. If I wasn’t in the #XRP case, I would’ve bought #LBC and asked to file an amicus brief.

I support @jeremykauffman & @LBRYcom and hate to be negative but Ripple should be ready to distinguish a ruling the SEC runs to show J. Torres.