Enter to open, tab to navigate, enter to select
Federal Court Dismisses Lawsuit Against Coinbase for Sale of Unregistered Securities
Practical Law Legal Update w-038-3970 (Approx. 5 pages)
Federal Court Dismisses Lawsuit Against Coinbase for Sale of Unregistered Securities
by Practical Law Finance
| Published on 08 Feb 2023 • USA (National/Federal) |
The United States District Court for the Southern District of New York (SDNY) issued an order dismissing a putative class action lawsuit against Coinbase for the listing and sale of unregistered securities on its platforms.
On February 1, 2023, the United States District Court for the Southern District of New York (SDNY) issued an order dismissing a putative class action against online digital trading platform operators Coinbase Global, Inc. and Coinbase, Inc. (collectively, Coinbase) and their founder and CEO, Brian Armstrong (Underwood et al. v. Coinbase Global, Inc. et al., Case No. 1:21-cv-08353). The lawsuit was brought on behalf of a nationwide class consisting of all persons or entities that transacted in digital assets on Coinbase platforms between October 18, 2019 and March 11, 2022 and subclasses tied to citizens of three states (California, Florida, and New Jersey) who traded on the platforms during that period.
The plaintiffs asserted claims for damages for Coinbase's sale or solicitation of unregistered securities in the form of digital tokens in violation state and federal securities law, including:
- Section 12(a)(1) of the Securities Act of 1933, as amended (Securities Act), which allows purchasers to sue sellers for offering or selling a non-exempt unregistered security.
- Section 29(b) of the Securities Exchange Act of 1934, as amended (Exchange Act), which provides that a contract made in violation of the US securities laws is void.
- The California Corporate Securities Law of 1968 (Cal. Corp. Code §§ 25110, 25130, and 25503), which addresses the offer and sale of unqualified securities.
- The Florida Securities and Investor Protection Act (Fla. Stat. Fla. Stat. §§ 517.07 and 517.211), which addresses the offer and sale of unregistered securities.
- The New Jersey Uniform Securities Act (N.J. Stat. §§ 49:3-60 and 49:3-71), which addresses offer and sale of unregistered securities.
In granting the motion to dismiss the lawsuit, the SDNY held that central to all asserted claims is the premise that the each of the tokens listed and sold on the Coinbase platforms were securities under the Howey test (see Practice Note, SEC Regulation of Digital Assets: The Howey Test: FinHub Framework Provides Additional Considerations for Digital Assets). In the order, the court assumed arguendo that the tokens are bona fide securities.
However, the court rejected plaintiffs arguments under the Securities Act and held plaintiffs' complaint and amended complaint failed to demonstrate, as required by Pinter v. Dahl (486 U.S. 622, 646 (1988)), that:
- Defendants were direct sellers of the tokens to plaintiffs. The court found that Coinbase's activities were part of its marketing efforts and noted that previous courts have failed to establish such acts as sufficient to establish active solicitation by a defendant. The court described Coinbase's participation in the transactions as "collateral."
- Defendants actively solicited the sale of the tokens to plaintiffs and did so for financial gain. The court held that even if the amended complaint demonstrated direct solicitation by Coinbase, plaintiffs did not indicate they purchased and sold tokens because of the solicitation.
The court rejected plaintiffs' Exchange Act claims, which sought rescission of the transactions involving tokens purchased on the Coinbase platforms, finding plaintiffs did not identify a contract that would support rescission. The court held that the argument that each individual purchase or sale on the Coinbase platform qualified as a contract within the meaning of the Exchange Act lacked factual support, as the amended complaint did not identify any transaction-specific contract.
The federal claims were dismissed with prejudice and the state law claims dismissed without prejudice, as the SDNY did not to exercise supplemental jurisdiction over the state claims.