Judge Upholds Motion to Dismiss Terraform Case, Disagrees with Ripple Decision

SEC Lawsuit Against Terraform Labs to Proceed

The United States Securities and Exchange Commission (SEC) lawsuit against Terraform Labs will be moving forward after a U.S. judge overseeing the case denied the firm’s motion to dismiss on July 31.

An earlier ruling from another judge that Ripple did not violate securities laws based on their manner of sale was also overturned.

On Feb 16, the SEC had filed a suit against Terraform Labs and its founder Do Kwon, accusing them of “orchestrating a multi-billion dollar crypto asset securities fraud.”

In April, Terraform Labs’ legal representatives filed a motion for the dismissal of the suit, with supplemental materials for the motion provided in June.

Crypto-Related Motion to Dismiss Rejected

Judge Jed Rakoff of the Southern District Court of New York recently denied the motion to dismiss filed by Terraform Labs and its founder. The SEC had contended that tokens such as Mirror Protocol (MIR), Terra Classic (LUNC), and TerraUSD Classic (USTC) are securities.

In response, Terraform Labs argued that the SEC had no jurisdiction, and pointed to the Supreme Court’s ruling on the major questions doctrine. They suggested that Congress was debating how to regulate crypto, and asked the SEC to wait for Congress to act. Additionally, they cited a procedural issue concerning emails from former SEC director William Hinman that were part of the Ripple Labs suit.

Crypto-Currency Industry and American Energy and Tobacco Industries

Judge Jed Rakoff of the Southern District Court of New York wrote that it would be unrealistic to compare the crypto-currency industry to the American energy and tobacco industries, implying that the major questions doctrine may not be applicable in the case and therefore dismissing the objection. Furthermore, the procedural questions were also dismissed.

The judge extensively discussed the Howey test, which was the focus of the Hinman discussion. Rakoff noted that no formal contract is required to satisfy the test, and tokens themselves can be regarded as tokens in legal arguments.

The court also denied to “draw a distinction between these coins [MIR and LUNA] based on their manner of sale.” This approach – that XRP (XRP) was a commodity when sold on the secondary market – was partially favorable to Ripple, and this ruling could be beneficial for the SEC if other judges follow Rakoff’s example.