Law Professors Examine SEC’s View of ‘Investment Contract’ in Coinbase Lawsuit 

The amicus brief comprised the subject knowledge of legal scholars at some of the top law schools in the United States.

Various legal scholars weighed in on the case on Friday by claiming that the SEC lawsuit against Coinbase is based on an understanding of securities regulations contradicting logic created 100 years ago. 

The group included law professors at Yale Law School, Fordham Law School, and the University of Chicago Law. They wrote an amicus brief supporting Coinbase by claiming that the phrase ‘investment contract’ has a more restricted scope than the SEC’s belief.

Law Scholars File Amicus Brief to Help Inform Lawsuit Decision

Via their joint filing, the scholars claimed their connections to some of the nation’s major law learning institutions are included for identification reasons alone. Besides, they were not talking from their respective schools. The amicus brief also seeks to influence how the lawsuit by the SEC will be decided by offering subject know-how.

In June, the Securities and Exchange Commission sued Coinbase with allegations that the company runs as an unregistered broker, exchange, and clearing house. The basis of these assertions is the belief by the agency that at least 13 cryptocurrencies trading on the platform are unregistered securities. 

The SEC highlighted the tokens by claiming that sales entail investment contracts under the alleged Howey-Test. This test plays a major role in seeking a monetary investment in a common enterprise with a sensible profit prospect to be acquired from others’ endeavors.

The loom test mostly comes into view in crypto and has been a current factor in the case by SEC against Ripples regarding XRP’s sales. The Securities and Exchange Commission has shown its intention to appeal the decision. 

However, District Judge Annalisa Torres held that XRP’s programmatic sale, carried out by Ripples on a planned basis and in the absence of formal contracts, failed to fulfill the Howey Test. Not long after, a judge refused to extend the decision by Torres when deciding on the Securities and Exchange Commission’s plea against Terraform Labs and Do Kwon.

The SEC claimed that an investment contract’s existence can comprise a ‘scheme’ and ‘fails to turn on in the presence of an official contract between parties.’ Nevertheless, legal scholars claimed that history would show something different.

Seller-Purchaser Contractual Agreement Affirmed in Securities’ Law

The scholars claimed that Congress’s passing of the Securities and Exchange Act of 1934 established that a contract agreement between purchasers and sellers was critical for an investment contract to exist. Further, they claimed this is founded on decisions concerning the alleged blue-sky regulations that the regulation was associated with.

The term ‘investment contract’ in the definition of security was initially included in a law ratified in Minnesota in 2019. Afterward, it was established in the court’s system that a contractual agreement was a critical element of this term.

The scholars claimed that other states later adhered to this standard. Specifically, they divulged that by 1933, the state courts had settled on a standard for implementing the term investment contract to refer to a contractual arrangement entitling an investor to a contractual part of the seller’s future assets, income, or profit.

According to the scholars, the Supreme Court has reiterated decisions that the state-level courts established. Further, each investment contract established at the greatest levels of the United State’s legal system entails a contractual responsibility between purchasers and sellers.

Law Scholars Urge Consideration of Investment Contract Within Entire Howey Test

The scholars also claimed that despite the landmark decision of the Supreme Court that resulted in how the Howey Test references the phrase ‘scheme,’ it was not intended to disregard the fundamental documented and historical foundation of what entails an investment contract. They believed including a ‘scheme’ would result in several contracts in the sale of an asset to be taken as a whole.

Based on these factors, the scholars stated that a decision supporting the Securities and Exchange Commission in its lawsuit against Coinbase would divert from the case law created before and following the Securities and Exchange Act of 1934.

Specifically, they claimed that an investment contract needs contractual undertakings to provide future value that reflects a business’s profits, incomes, or assets. Adherence to the term’s settled meaning should be adhered to by the court.  

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