By Michael Scott
The crypto community is excited about the DeFi Education Fund (DEF) lawsuit that challenges the US Securities and Exchange Commission’s (SEC) aggressive enforcement actions. The pre-emptive lawsuit argues that crypto airdrops lack securities qualification as they do not invest money.
The pre-emptive lawsuit against the Securities and Exchange Commission (SEC) spotlights the aggressive enforcement actions undertaken by the US regulators. The lawsuit is filed in the defense of Texas-based apparel firm Beba.
DEF Files Offensive Lawsuit Challenging SEC’s Authority Over Airdrops
The DEF filed the preemptive lawsuit in the Texas federal court on Monday, March 25, disputing the claims that Beba violated US securities laws when it airdropped the BEBA crypto token freely to the customers.
The lawsuit seeks a court order that officially declares the BEBA airdrop legal. The DEF intends to protect existing and subsequent airdrops from the SEC litigation potentially.
The DEF submitted in the Texas District Court filing that Beba undertook plans to engage in activity compliant with the US securities law. Nonetheless, the SEC policy labels the exercise unlawful.
The filing by DEF acknowledges that the crypto industry faces an existential threat from the SEC, which has recently emerged as an overzealous regulator. It portrays the SEC as overreaching its authority to target the digital assets industry via aggressive enforcement actions.
Beba is yet to face a lawsuit from the Gary Gensler-led SEC, though it pre-emptively invokes the provisions of the Declaratory Judgement Act. The Act permits any party to pursue legal recourse before suffering damages. The law applies where the party reasonably believes it will face unjustified enforcement actions.
The move by DEF and Beba portrays an offensive initiative where the crypto industry is shifting from the historical defense against the sporadic lawsuits filed by the regulators. The pre-emptive lawsuit alters how crypto firms and projects have played defense in numerous charges leveled without warning.
DEF Legal Executive Laments Defensive Role by Crypto Industry
The DEF chief legal executive Amanda Tuminelli hailed the pre-emptive lawsuit as a change in strategy for the crypto industry. The key argument in the DEF’s filing on Monday is the accusation that the SEC contravened the Administrative Procedures Act (APA). The argument alleges that the SEC created unofficial internal crypto policies without public disclosure.
Tuminelli observes that the SEC repeatedly maintains that the agency does not need crypto-specific rules. Instead, it reiterates that the regulator only enforces the existing securities laws it profiles as plainly applying to multiple crypto offerings.
Tuminelli illustrates that the SEC has a policy deployed to bring enforcement actions, issue subpoenas, and conduct investigations. He adds that the SEC adopted the policy behind closed doors and foregone its documentation, thus violating the APA.
The DEF preemptive suit comes a month after a group comprising leading crypto firms led by Andreessen Horowitz and crypto exchange Coinbase sued the securities watchdog in the Texas federal court. The plaintiffs alleged that the SEC lacks jurisdiction over a substantial portion of the crypto industry.
Crypto Industry Supports Proactive Legal Actions Against SEC
The suit filed by DEF in support of Beba is among the proactive legal actions undertaken against the federal regulator over the oppressive policies targeting crypto firms and projects.
The DEF lawsuit breaks the ceiling where crypto projects have suffered victim to the aggressive legal actions pursued by the SEC for several years. Tuminelli considers the absence of offensive action from the crypto industry to be challenging in finding parties willing to sue the SEC.
Tuminelli admits that the risks firms such as Beba face when utilizing crypto tokens are evident in the tactical advantage realized. Such is bound to attract the SEC’s action, hence the need for preemptive action.
The DEF legal attorney indicates that the SEC has previously targeted crypto firms with a similar scope as Beba. In particular, despite never raising money, the SEC leveled charges against Tomahawk Exploration LLC for promoting and distributing Tomahawkcoins.
The SEC 2022 opened charges against the Hydrogen Technology Corporation (HTC), arguing it distributed free Hydro tokens for its marketing objective and created a secondary market.
DEF considers that such distributions do not satisfy securities transaction qualifications as they lack money investment from the counterparties. Airdropping crypto tokens fails to meet the central tenant of the Howey Test applied by the SEC in identifying investment contracts.
The DEF arguments in the Monday filing are timely, given that free airdrops have taken the crypto by storm since the onset of 2024, Projects and companies have raised billions of dollars by dropping tokens freely, saving them from legally vulnerable initial coin offerings (ICOs).
The University of Kentucky legal scholar Brian Frye hailed DEF for its solid case, arguing that airdrops are beyond the SEC’s jurisdiction. The law professor has criticized the approach adopted by crypto firms such as Coinbase in arguments underestimating the broad authority of SEC pegged on the Howey Test framework.
Frye considers DEF claims on airdrops as reasoned, though he admits that proving the SEC contravened the APA could become an uphill battle. The scholar indicates that the SEC does not need notice when the party can make a case to the court.