Written by Aiying
Aiying has analyzed the Binance case many times, but I think it is worth analyzing the court’s dismissal of several lawsuits filed by the SEC. Let’s go straight to the point and review the general contents of the legal documents:
Case Background
The SEC accused Binance and related parties of violating multiple provisions of the Securities Act and the Securities Exchange Act, including unregistered issuance and sale of crypto assets, operating an unregistered cryptocurrency trading platform, and making false statements and fraud to investors.
Main content:
Binance background: Binance is a company registered in the Cayman Islands and has been operating an international crypto asset trading platform since 2017. Changpeng Zhao is its founder and CEO. BAM Trading is the entity that operates the Binance.US platform in the United States and was established in 2019.
The SEC’s allegations: Unregistered issuance and sale of crypto assets such as BNB (Binance Coin), BUSD (Binance Stablecoin), Simple Earn and BNB Vault programs.
The Binance.com and Binance.US trading platforms are not registered and operated.
As the controller, Zhao Changpeng is responsible for the operations and violations of these platforms.
BAM management and the trading platform made false and misleading statements to investors and engaged in fraud.
The Court's preliminary decision:
The court decided that most of the case could proceed, but some charges were dismissed, specifically count two (related to BUSD) and portions of counts one and three.
Securities Law and Securities Exchange Act
The SEC accused Binance and related parties of violating multiple provisions of the Securities Act and the Securities Exchange Act, including the following major legal provisions:
Securities Act of 1933
Sections 5(a) and 5(c): These two sections prohibit the offer or sale of securities by mail or other interstate commerce (including the Internet) without registration. The SEC alleges that Binance violated these sections by offering and selling crypto assets such as BNB (Binance Coin), BUSD (Binance Stablecoin), Simple Earn, and BNB Vault without registration.
Securities Exchange Act of 1934
Section 5: requires securities exchanges operating in the United States to register with the SEC. The SEC alleges that Binance and BAM Trading violated this provision by operating the Binance.com and Binance.US platforms without registration.
Section 15(a): Requires platforms that operate as brokers or dealers to register. The SEC alleges that Binance.com and Binance.US violated this provision by failing to register as brokers or dealers.
Section 17A(b): requires clearing houses (i.e., institutions that process and record securities transactions) to register. The SEC alleges that Binance.com and Binance.US violated this provision by failing to register as clearing houses.
Sections 17(a)(2) and (a)(3) of the Securities Act of 1933:
Sections 17(a)(2) and (a)(3) prohibit false statements or fraudulent practices in connection with the offer or sale of securities. The SEC charged BAM Management and BAM Trading with violating these sections by making false and misleading statements to investors.
Let me show you the status in a table:
The court refuted some of the allegations of legal interpretation
The reason for dismissal of the BUSD allegation (the second allegation): The court held that the SEC failed to adequately prove that BUSD met the criteria for an “investment contract” (investment contract). The court pointed out that the SEC’s allegation described the way BUSD was issued and sold and the way the proceeds were distributed, which was significantly different from the allegation that the parties successfully evaluated BNB. The SEC did not adequately show how BUSD met each of the criteria in the Howey test, so the allegation failed.
Reason for dismissal of the Simple Earn Program (part of the third charge): The court held that the SEC’s description of the Simple Earn Program did not meet the criteria for an investment contract. The court pointed out that although the SEC mentioned keywords such as “profit opportunity”, “capital pooling” and “management expertise”, these descriptions were not sufficient to prove that the Simple Earn Program constituted an investment contract. Therefore, this part of the charge was dismissed.
Allegations of BNB secondary market sales (part of the first allegation): The court dismissed the allegations involving BNB sales in the secondary market on the grounds that the SEC failed to adequately explain how BNB sold in the secondary market by non-Binance sellers met the definition of "securities". The court held that the SEC's allegations focused primarily on Binance's own sales practices, and that the SEC did not provide sufficient legal and factual basis to prove that third-party sales in the secondary market were also subject to the Securities Act.
Case Inspiration
How can Web3 organizations in the United States or serving American users avoid possible criticism and prosecution by the SEC? Aiying Aiying summarized the following points for your reference:
1. Clearly define the purpose and function of the token
Practicality first: Make sure the functionality of your token in the project is clear, such as being used to pay transaction fees, access platform services, participate in community governance, etc. The main purpose of the token should be closely related to the actual operation of the platform, rather than being primarily an investment tool.
Reduce speculation: Avoid over-emphasizing the appreciation potential or investment returns of tokens in marketing, and highlight their actual use in the ecosystem. Clearly tell users the use scenarios and actual functions of tokens to prevent the SEC from identifying them as "securities."
2. Transparent issuance and management process
Avoid ICO pitfalls: If you are conducting a token sale, especially an ICO, make sure the sale process complies with legal requirements. Consider a private sale (i.e., only to accredited investors) or a registered sale to ensure compliance.
Transparent management: Clearly disclose how project funds are used to ensure that the management and use of funds are transparent and consistent with the initial commitment. Provide regular financial reports and project progress reports to avoid attracting the attention of the SEC due to opaque use of funds.
3. Comply with current laws and regulations
Registration or exemption from registration: When operating in the U.S., make sure your project meets the SEC’s requirements for securities issuance. If the token may be considered a security, consider registering or applying for an exemption to legally issue the token.
AML and KYC requirements: Comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) legal requirements. Ensure that platform users undergo strict identity verification during the registration and transaction process to prevent illegal activities.
4. Collaborate with legal and compliance experts
Hire legal counsel: Always work with experienced cryptocurrency legal counsel during the process of project development and token issuance. Legal counsel can help you assess the legal risks of your project and ensure that legal regulations are followed at all stages of the project.
Compliance team: Establish or hire a dedicated compliance team to monitor regulatory changes around the world and adjust projects in a timely manner to comply with new regulatory requirements.
5. Clear marketing and communication strategy
Careful marketing: Avoid using language that could make the token be seen as an investment contract in publicity and promotion. For example, avoid promising high returns or emphasizing the speculative value of tokens, and focus more on the project's technological innovation, community value, and the actual use of tokens.
Educate users: By publishing educational materials, help users understand the functions and use cases of tokens and avoid legal issues caused by misunderstandings or wrong expectations.
6. Prudent governance and operating model
Decentralized governance: If a project claims to be decentralized, ensure that the governance structure is truly decentralized, users can participate in the decision-making process, and reduce the centralized control of the issuer or development team. This helps prevent the SEC from defining the project as a "security" controlled by a few people.
Community-driven: Build strong community support and empower users through voting and other mechanisms, reduce the project's dependence on core team members, and further reflect decentralization.
7. Legal secondary market operations
Control market manipulation risks: In secondary market operations, avoid manipulating market prices and ensure that all market transactions are fair and transparent. Regularly monitor market behavior to prevent manipulation that may attract the attention of the SEC.
Compliance listing: Before listing a token, ensure that the exchange complies with local legal requirements. Especially when listing in the United States, choose an exchange that already complies with SEC regulatory requirements.
8. Prepare for future legal challenges
Prepare contingency plans: Prepare contingency plans for legal challenges in advance, including the selection of legal defense teams, communication strategies with regulators, etc. If you encounter a regulatory investigation, you can respond quickly.
Work with regulators: If the regulatory environment changes, proactively working with regulators to demonstrate your willingness to adjust your project to comply with new regulations can reduce conflict and potentially lead to a settlement.
