When Do Secondary Token Sales Violate Howey?

A federal judge overseeing the U.S. Securities and Exchange Commission's case against Binance ruled that most of the case can proceed, but dismissed charges tied to the sale of BUSD and secondary sales of BNB.

A federal judge has dismissed a charge brought by the U.S. Securities and Exchange Commission against Binance that alleged that secondary sales of BNB by sellers who aren't Binance constituted an investment contract.

The SEC had argued that the sale of BNB by any seller was part of a common enterprise with Binance, and that the sellers were therefore offering an investment contract. However, the judge ruled that the SEC had not sufficiently pled that the secondary sales were investment contracts.

The judge noted that the SEC attorneys had stated in court that they were not taking the position that a token on its own was a security, but that if a token's initial sale carried marketing materials or other factors that suggested it was a security, those factors would continue to apply through future sales.

The judge wrote that insisting that an asset that was the subject of an alleged investment contract was itself a "security" as it moved forward in commerce and was bought and sold by private individuals on any number of exchanges, and was used in any number of ways over an indefinite period of time, marked a departure from the Howey framework that left the Court, the industry, and future buyers and sellers with no clear differentiating principle between tokens in the marketplace that are securities and tokens that aren't.

However, the judge also wrote that more was needed to support the SEC's arguments about ongoing sales of tokens, and that one big issue may be that the SEC just didn't have enough in its filings or oral arguments at this time.