The Securities and Exchange Commission (SEC) filed a complaint in the District of New Hampshire on Monday against crypto-based decentralized publishing platform LBRY Inc. for allegedly offering unregistered securities in violation of the Securities Act of 1933.
According to the complaint, since 2016 LBRY has “offered and sold millions of dollars’ worth of unregistered securities to investors” via its LBRY Credits (LBC), a digital asset which LBRY told investors would build its “digital content marketplace” or LBRY Network, a service providing video and audio recordings and other content. The SEC claimed that LBRY offered and sold LBC as “investment contracts,” assuming that their value would increase which means LBC is considered securities.
The Commission alleged that in mid-2016, “LBRY offered and sold LBC to the public in exchange for contributions designed to allow LBRY to build the LBRY Network.” Notably, between 2016 and 2020 LBRY sold more than 13 million LBC to the general public through two online digital asset trading platforms, according to the complaint. The SEC stated that “LBRY sold the LBC on the digital asset trading platforms in exchange for bitcoin then valued at more than $5 million.” From October 2017 to April 2018, LBRY reportedly sold LBC to investment funds totaling more than $250,000 and again in May 2018 for $360,000. In sum, the SEC claimed that LBRY received more than $11 million in U.S. dollars, Bitcoin, and services from purchasers who participated in its unregistered offering between 2016 and 2020.
Allegedly, LBRY used the funds it raised from the sale of LBC “to pay for the operational costs to grow the LBRY Network, which, as LBRY publicly represented, would cause the price of LBC held by investors to appreciate.” Furthermore, the SEC noted, since LBRY had the largest share of LBC, it also anticipated to profit from an increase in the value of LBC.
The SEC claimed that LBRY repeatedly represented to venture capital investors that “it projected the LBC that it held itself would eventually be worth billions of dollars once it built the LBRY Network to its anticipated scale.” Additionally, the SEC proffered that LBRY had a vendor use 40 million LBC from its institutional fund to act as a market maker, operating as a middle man to buy and sell LBC on a “regular and continuous” basis at prevailing market prices, which the SEC claimed led investors to believe that the platform could be profitable.
However, LBRY did not register its offer and sale of LBC with the SEC, consequently, LBRY violated and continues to violate Section 5(a) and 5(c) of the Securities Act, which regulates the offer and sale of securities. Through its complaint, the SEC seeks a permanent injunction enjoining LBRY from engaging in this conduct or any other conduct relating to unregistered securities. Additionally, the SEC seeks disgorgement of ill-gotten gains, prejudgment interest, and civil penalties.
In the wake of the SEC’s lawsuit, LBRY added a portion to its website addressing the lawsuit. LBRY called the claim that LBC are unregistered securities offerings “a tremendous threat to the entire cryptocurrency industry.” LBRY also noted that the SEC has been investigating this matter for three years.
This lawsuit is the latest Commission effort to crack down on cryptocurrency and unregistered securities. Other efforts were against Telegram, Ripple and Kik Interactive.
