SEC Faces Lawsuit Seeking To Exempt Airdrops From Securities Classification

The DeFi Education Fund teamed up with Beba Collection, a small apparel company, in a bid to get regulatory clarity from the courts on airdrops.

By: Samuel Haig Loading...

SEC Faces Lawsuit Seeking To Exempt Airdrops From Securities Classification

The U.S. Securities and Exchange Commission is facing a lawsuit challenging its ability to treat airdropped tokens as securities.

On March 25, The DeFi Education Fund (DEF), a web3 advocacy organization, announced it had teamed up with Beba Collection, a Texas-based apparel company, to sue the SEC to try and get a U.S. court to rule that the BEBA token does not comprise a securities investment contract.

Beba, which airdropped its BEBA token to Unisocks and early Base Name holders, has not received a complaint from the SEC but is pre-emptively seeking a court ruling protecting its token from securities classification. The SEC has notoriously pursued an aggressive campaign of regulation-by-enforcement targeting digital asset issuers in recent years, claiming that digital assets comprise securities assets.

The DEF asserts that BEBA does not comprise an investment contract according to the Howey Test — a series of four questions used to determine whether an asset comprises a security. Howey describes that “investment contracts” require an “investment of money” between parties, meaning BEBA does not comprise a security asset due to it being distributed via airdrop, according to the complaint.

The DEF asserted that a court ruling supporting its claims would establish precedent for the broader web3 sector, protecting entities that have distributed a token through an airdrop from future SEC enforcement actions.

“If the court rules that BEBA tokens are not investment contracts and free airdrops are not securities transactions, it will provide much-needed clarity to the industry,” DEF said.

The lawsuit also aims to secure a court declaration that the SEC violated the Administrative Procedure Act (APA) by adopting a policy asserting that nearly all digital assets comprise securities investment contracts without adhering to its formal rulemaking process.

Per the APA, new rules must be established through a process including providing public notice and fielding public feedback, which the DEF says the SEC has failed to do.

“The crypto industry is facing an existential threat from an overzealous regulator who is abusing its power by targeting our industry through unending aggressive enforcement action,” the DEF said. “Since Chair Gensler took office, the SEC… adopted a radical new policy and began aggressively enforcing it.”

The DEF said a court ruling asserting that the SEC violated the API would provide “a massive barrier to the SEC’s continued campaign of regulatory overreach.”

The DEF is not alone in seeking recourse against the SEC’s regulation-by-enforcement crusade, with Coinbase, the top U.S.-based centralized exchange, filing its own complaint against the agency in April 2023.

Coinbase’s suit sought to compel the SEC to abide by its formal rulemaking process with regards to crypto industry regulation. The SEC has also filed legal action against Coinbase, claiming the exchange has facilitated securities trading without the necessary licensing.

The DeFi Education Fund first emerged as a controversial organization in July 2021, with the project offloading half of its 1 million UNI token grant from the Uniswap Foundation for $10 million shortly after receiving the assets. The DEF said that diversifying its holdings would provide it with a “sustainable budget” to weather a variety of market conditions and ensure future runway.