LEJILEX v. SEC: Crypto Trading Platform Sues SEC for Wrongly Asserting Jurisdiction over Crypto Industry | Practical Law

LEJILEX v. SEC: Crypto Trading Platform Sues SEC for Wrongly Asserting Jurisdiction over Crypto Industry | Practical Law

Digital asset trading platform LEJILEX and the Crypto Freedom Alliance of Texas have filed suit against the SEC for overstepping its jurisdiction, arguing that the SEC is incorrect in its view that most digital asset transactions involve investment contracts under the federal securities laws.

LEJILEX v. SEC: Crypto Trading Platform Sues SEC for Wrongly Asserting Jurisdiction over Crypto Industry

by Practical Law Finance
Published on 26 Feb 2024USA (National/Federal)
Digital asset trading platform LEJILEX and the Crypto Freedom Alliance of Texas have filed suit against the SEC for overstepping its jurisdiction, arguing that the SEC is incorrect in its view that most digital asset transactions involve investment contracts under the federal securities laws.
On February 21, 2024, crypto company LEJILEX and the Crypto Freedom Alliance of Texas (CFAT) (collectively, plaintiffs) filed a complaint against the SEC, SEC Chair Gary Gensler, the regional director of the Fort Worth office of the SEC, and the SEC commissioners (collectively, SEC) in the US District Court for the Northern District of Texas for overstepping SEC jurisdiction. Plaintiffs assert the SEC is incorrect in its view that most digital asset transactions involve investment contracts under the federal securities laws.
According to the complaint:
  • Plaintiff LEJILEX is a for-profit company that wishes to launch a new digital asset trading platform called Legit.Exchange, a non-custodial digital asset trading platform that allows users to trade digital assets with each other through the use of underlying smart contracts.
  • Plaintiff CFAT is a nonprofit organization whose members, including LEJILEX, advocate for "sensible" digital asset regulation.
In the complaint, plaintiffs allege that they brought the action to seek declaratory and injunctive relief to:
  • Prevent the SEC from unlawfully charging them and their members with violating the US securities laws based on the SEC's "fundamentally mistaken view" of its regulatory power.
  • End the SEC's efforts to unlawfully extend its regulatory authority to cover nearly all digital assets.
In the complaint, LEJILEX asserts that trades on Legit.Exchange occur through blind bid/ask transactions, meaning that buyers and sellers never know who is on the other side of any trade. LEJILEX claims that it never takes custody of customer assets but retains control over which digital assets can be traded on the platform and handles administrative functions like user verification while charging a commission on trades made through the platform.
According to the complaint, LEJILEX 's design is intended to provide users the benefits associated with non-custodial smart contracts while ensuring that LEJILEX can maintain the service level, technical security, and compliance checks that larger financial entities may require of a digital asset trading platform.
LEJILEX is seeking injunctive and declaratory relief to ensure that it does not have to register with the SEC as a securities exchange, broker, or clearing agency. According to the complaint, LEJILEX faces a genuine threat that when the Legit.Exchange launches, the SEC will bring an enforcement action claiming that LEJILEX is operating an unregistered securities exchange, broker, or clearing agency. LEJILEX argues that even if it wanted to, it could not register as a securities exchange, broker, or clearing agency with the SEC because the SEC has not promulgated any regulations providing for the registration of digital asset platforms like Legit.Exchange.
As for CFAT, it alleges that:
  • Its members, including LEJILEX, face a clear and imminent threat of unlawful SEC enforcement actions for their existing or intended activities.
  • The SEC's "capacious view of its own authority" hinders CFAT from pursuing its mission of advocating for the responsible development of digital asset policies in Texas to foster innovation and economic growth while protecting consumers.
  • By asserting broad dominion over the digital asset industry, the SEC impedes the ability of other authorities whose jurisdiction may "properly" extend to digital assets to enter the field, making it harder for CFAT to convince Texas policymakers to develop and adopt the sensible policies that the Texas digital asset industry needs.
Plaintiffs allege that the common feature among the instruments included in the definition of "securities" in the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, is not that parties may purchase them hoping to turn a profit, but that they all involve an ongoing relationship between the purchaser and the issuer or seller. Plaintiffs further argue that in SEC v. W.J. Howey Co. (328 U.S. 293 (1946)), the Supreme Court explained that the term "investment contracts" does not encompass any and all transactions involving something one may purchase with the hope that it will increase in value, but instead applies only when parties have entered into an ongoing relationship involving an investment into a common enterprise, with continuing obligations on the part of the issuer or seller to manage that enterprise for the benefit of its investors and share resulting profits.
Plaintiffs also allege that the SEC's "novel claim of sweeping regulatory authority" is foreclosed by the major questions doctrine because Congress has not granted the SEC new statutory authority or changed the relevant statutory text to grant the SEC its purported authority over the crypto industry. The major questions doctrine has also been raised in other SEC crypto litigation, specifically: