Law Professors Blast SEC’s Concept of Investment Contract

Law Professors Blast SEC’s Concept of Investment Contract – A group of six law professors from various U.S. universities have submitted an amicus brief to support Coinbase, criticizing the U.S. Securities and Exchange Commission’s interpretation of investment contracts by highlighting the historical evolution of securities laws. The brief asserts that an investment contract necessitates commitments to provide future value.

Stephen M. Bainbridge of UCLA, Tamar Frankel from Boston University School of Law, Sean J. Griffith from Fordham Law School, Lawrence Hamermesh from Widener University Delaware Law School, M. Todd Henderson from University of Chicago Law School, and Jonathan R. Macey from Yale Law School contends that in order for the tokens listed on Coinbase to qualify as investment contracts, the entities issuing these tokens must have specific contractual obligations towards the investors.

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Within their legal document, the professors of law delve into the historical roots of securities laws, illustrating that the existing framework for securities law drew influence from “blue sky laws” designed to protect investors from securities fraud. These laws often hinged on contractual agreements between issuers and investors to define the nature of an investment contract.

Based on the analysis of numerous cases by the legal experts, it becomes evident that in every instance where the Supreme Court and the second circuit acknowledged the presence of investment contracts, there existed some form of contractual obligation between issuers and investors, even in trials conducted after the Howey test was established.

This view is also shared by Coinbase, which introduced a filing on June 28 declaring that “an economic arrangement can qualify as an investment contract only if it involves

an ongoing business enterprise whose management owes enforceable obligations to investors.” 

The brief states the court should “adhere to the settled meaning of the term—consistently applied by the state courts interpreting state blue-sky laws, as well as by the federal appellate courts before and since Howey.” Concluding that: “Under that settled meaning, an investment contract requires contractual undertakings to deliver future value reflecting the income, profits, or assets of a business.” 

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However, this view runs counter to SEC filings, which stated that Coinbase “attempts to construct its own test for what constitutes an investment contract.” For the regulator, even in the absence of a contractual obligation, an arrangement might be considered an investment contract, detailing that “Howey did not require a common law contract, and no court has held otherwise.”

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