Paradigm and a16z File Joint Amicus Brief in SEC v. Coinbase

TLDR: Paradigm and a16z filed a joint amicus brief in SEC vs. Coinbase that supplements the arguments made by Coinbase in its filing last week and demonstrates why the SEC’s approach is unsupported by case law and represents a significant and problematic expansion of its regulatory authority.

Our amicus brief agrees with Coinbase’s fundamental submission: Supreme Court precedent supports the requirement of a contractual obligation to find an “investment contract.” Since the SEC’s complaint fails to plead any such contract, it should be dismissed.

In addition, the brief makes three supplementary points:

First, the test for an investment contract established in Howey, even if understood to extend beyond contractual arrangements, does not justify the SEC’s unprecedented claims against Coinbase. The SEC attempts to exert jurisdiction over secondary market transactions of digital assets by relying on the word “scheme” in the trilogy of words in Howey describing an investment contract (“contract, transaction or scheme”). Whatever breadth the word “scheme” might have, the SEC has failed to allege the existence of any relationship between the original developers of digital assets and the independent and unrelated market participants who engaged in exchange-based transactions. Nor do the secondary market transactions of digital assets satisfy the “common enterprise” element of the Howey test, since the SEC has failed to allege any identifiable legal or business relationship between digital asset developers and the parties involved in secondary market transactions.

Second, taken to its logical conclusion, the SEC’s position would sweep into the agency’s jurisdiction ordinary transactions in a range of commodities, collectibles, and other assets that the securities laws have never reached. Sales of commodities like oil, collectibles like art, or even a Tesla would, under the SEC’s boundless theories, suddenly become subject to the securities laws. This dramatic expansion of the SEC’s jurisdiction is not only unwarranted, but would also have a destabilizing effect on large swaths of the economy.

Finally, the law, correctly interpreted, forecloses the SEC’s claims— but if any doubt remains, the major questions doctrine prevents the SEC from unilaterally expanding its authority and jeopardizing the development of a critical technology in the United States. Instead, Congress must craft the appropriate rules. Regulation is essential to address the novel questions raised by blockchain technology and digital assets, which were unforeseeable when Congress enacted the securities laws nearly a century ago. But allowing the SEC to generate new rules through ad hoc expansion of the securities laws creates an unpredictable legal environment that harms entrepreneurs and consumers alike.