Coinbase initiates appeal against SEC on investment contract classification for digital assets

Coinbase has filed a motion to appeal a judge’s decision from last month that allowed the SEC’s lawsuit against them to proceed, said Paul Grewal, Coinbase’s chief legal officer, in an X post today. The appeal, if granted, would allow the Second Circuit Court to review the SEC’s authority to classify certain digital asset transactions as investment contracts, potentially suspending the ongoing trial.

Today @Coinbase filed a brief asking the Court’s permission to seek an interlocutory appeal in our @SECGov case on this controlling question: whether an “investment contract” requires something contractual – we think it does, the SEC disagrees. 1/5 https://t.co/M5HgMQxCLF

— paulgrewal.eth (@iampaulgrewal) April 13, 2024

Coinbase’s motion focuses on whether digital asset purchases qualify as “investment contracts” under SEC rules, a resolution that would have far-reaching implications across the digital asset industry. The firm seeks a clear ruling from a higher court to end uncertainty.

According to Coinbase, the definition of an investment contract has included the necessity of post-sale obligations, a standard upheld by both the Supreme Court and the Second Circuit for nearly a century. Despite this, the SEC has aggressively pursued a new interpretation, suggesting that the mere integration of digital assets into a token’s ecosystem could constitute an investment contract.

” In the 90 years since the federal securities laws were enacted, neither the Supreme Court nor the Second Circuit has ever found an investment contract without a post-sale obligation. But in a blitz of recent enforcement actions against the digital asset industry, the SEC has advanced the theory that no such obligation is required,” stated Coinbase’s legal defense.

This approach has sparked widespread debate among lawmakers, regulators, and industry participants, with even SEC Commissioners acknowledging the regulatory uncertainty plaguing the crypto sector, Coinbase notes. The firm argues that the SEC’s broad interpretation is creating uncertainty in an industry that has seen exponential growth and economic influence.

Coinbase’s legal defense challenges the SEC’s claims, asserting that the transactions in question lack the traditional elements of an investment contract. According to the company, the Second Circuit’s appeal is an appropriate vehicle to provide urgently needed guidance on this important legal matter.

“The application of Howey to digital asset transactions raises hard questions. That Members of Congress, Senators, and regulatory agencies have divided in answering them bespeaks the difficulty of the subject matter, and the divergent judicial outcomes illustrate the point. As a result of these divisions, a “cloud of legal uncertainty [] hangs over” the digital asset industry…This case offers the ideal vehicle for the Second Circuit to quickly and cleanly remove it,” stated Coinbase’s legal defense.