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U N I T E D S T AT E S D I S T R I C T C O U R T
F O R T H E D I S T R I C T O F N E W H AM P S H I R E

S e c u r it ie s a n d E x c h a n g e C o m m is s i o n

v. Ca se No. 21-cv-260-P B
Opin ion No. 2022 DNH 138
L B R Y, I n c .

ME MO R AN D U M AN D O R D E R

Th e Secu r it ies a n d E xch a n ge Com m ission (SE C) con t en ds t h a t LBRY,

In c. offer ed a n d sold u n r egist er ed secu r it ies in viola t ion of Sect ion 5 of t h e

Secu r it ies Act of 1933. LBRY r espon ds t h a t it does n ot n eed t o com ply wit h

t h e Secu r it ies Act beca u se it s a lleged secu r it y, a blockch a in t oken ca lled LBC,

is n ot a secu r it y a t a ll. In st ea d, it a r gu es t h a t LBC fu n ct ion s a s a digit a l

cu r r en cy t h a t is a n essen t ia l com pon en t of t h e LBRY Blockch a in . LBRY a lso

a sser t s t h a t t h e SE C’s a t t em pt t o t r ea t LBC a s a secu r it y viola t es it s r igh t t o

du e pr ocess beca u se t h e a gen cy did n ot give LBRY fa ir n ot ice t h a t it s

offer in gs of LBC a r e su bject t o t h e secu r it ies la ws. Th e pa r t ies h a ve filed

cr oss-m ot ion s for su m m a r y ju dgm en t a ddr essin g bot h issu es.

I. B AC KG R O U N D

Th e n a scen t t ech n ology kn own a s blockch a in oper a t es in t h e

ba ckgr ou n d of t h is dispu t e. F r om it s ea r liest da ys, pr opon en t s of block ch a in

t ech n ology h a ve en vision ed it a s fu n da m en t a lly a lt er in g m a n y a spect s of

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m oder n life. See Sa t osh i Na k a m ot o, Bit coin : A P eer -t o-P eer E lect r on ic Ca sh

Syst em (2008), h t t ps://bit coin .or g/bit coin .pdf (ou t lin in g t h e idea for a peer -t o-

peer elect r on ic pa ym en t syst em ). As LBRY expla in s, a blockch a in is

essen t ia lly a “decen t r a lized ledger m a in t a in ed by a n et wor k of in depen den t ly

own ed com pu t er s.” See Ka u ffm a n Decl., Doc. No. 61-3 a t 2 ¶ 5. Ver ified da t a

is h eld in decen t r a lized “block[s]” lin ked t oget h er via cr ypt ogr a ph ic con sen su s

pr ot ocols. See id. a t 2 ¶ 9. New da t a is con n ect ed t o pr eviou s blocks, for m in g a

ch a in . See id. a t 2 ¶ 6. Digit a l t ok en s a r e u sed t o com pen sa t e “m in er s” wh o

va lida t e t r a n sa ct ion s a n d a llow for peer -t o-peer “t r a n sfer s of va lu e,” wh ich

a r e t h en logged in t h e decen t r a lized ledger . See id. a t 2 ¶ ¶ 6, 9; see a lso

Mor ici v. H a sh fa st Tech s. LLC, No. 5:14-cv-00087-E J D, 2015 WL 906005, a t

*2 (N.D. Ca l. F eb. 27, 2015) (fu r t h er discu ssin g t h e t ech n ica l det a ils of

“m in in g”).

A. T h e D e v e lo p m e n t o f t h e L B R Y N e t w o r k

LBRY bega n a s a n effor t t o h a r n ess blockch a in t ech n ology t o a llow

u ser s t o sh a r e videos, im a ges, a n d ot h er digit a l con t en t wit h ou t a cen t r a lized

h ost su ch a s You Tu be. See Def.’s Mem ., Doc. No. 61-1 a t 3. LBRY a sser t s t h a t

it s LBRY Net wor k is “t h e fir st decen t r a lized, open -sou r ce, fu lly en cr ypt ed

con t en t dist r ibu t ion ser vice bu ilt u sin g t h e sa m e blockch a in t ech n ology t h a t

u n der lies Bit coin .” See In t r odu cin g LBRY: Th e Bit coin of Con t en t , Doc. No.

61-9 a t 1. Th e LBRY Net wor k is com pr ised of t h r ee com pon en t s: “(1) t h e

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LBRY Blockch a in , (2) t h e LBRY Da t a N et wor k, a n d (3) t h e a pplica t ion s

la yer [.]” Ka u ffm a n Decl., Doc. No. 61-3 a t 3 ¶ 11. LBRY developed t h e “LBRY

Deskt op Applica t ion ” t o r u n on t h e LBRY Net wor k. 1 Id. a t 9 ¶ 26. LBRY h a s

a lso developed ot h er a pplica t ion s t o r u n on t h e n et wor k, a s h a ve ot h er t h ir d-

pa r t y developer s. Id. a t 4 ¶ 11. LBRY Cr edit s, or LBC, is t h e n a t ive digit a l

t oken of t h e LBRY Blockch a in . Id. a t 4 ¶ 12. It is u sed t o com pen sa t e m in er s,

bu t it ca n a lso be spen t on t h e LBRY Blockch a in t o pu blish con t en t , cr ea t e

“ch a n n el[s]” t h a t a ssocia t e con t en t wit h a sin gle u ser , t ip con t en t cr ea t or s,

pu r ch a se pa ywa ll con t en t , or “boost []” ch a n n els or con t en t in sea r ch r esu lt s.

See id. a t 5-6 ¶ 17. User s gen er a lly m u st pa y a fee in LBC in or der t o

“in t er a ct wit h t h e LBRY Net wor k for a n yt h in g beyon d viewin g fr ee con t en t .”

Id. a t 4 ¶ 12.

Th e LBRY Net wor k wa s design ed t o even t u a lly h a ve a cir cu la t ion of

a ppr oxim a t ely 1 billion LBC. See id. a t 4 ¶ 13. Most of t h e LBC will be

r elea sed in t h e fu t u r e t o com pen sa t e m in er s, bu t wh en t h e LBRY Blockch a in

la u n ch ed in J u n e 2016, LBRY r eser ved a “pr e-m in e” of 400 m illion LBC for

it self. See id. a t 5-6 ¶ ¶ 14-15; see a lso Ka u ffm a n Dep., Doc. No. 62-20 a t 5. It

t h en sor t ed it s LBC in t o t h r ee bu ck et s: (1) 200 m illion in t o a “Com m u n it y

1 LBRY h a s r en a m ed t h is a pplica t ion “Odysee.” Ka u ffm a n Decl., Doc. No. 61-

3 a t 10 ¶ 35.

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F u n d,” t o be u sed for “spr ea din g u sa ge a n d a dopt ion ” of t h e Net wor k by

“r ewa r din g ea r ly a dopt er s,” “r ecr u it in g pr odu cer s,” a n d “r ewa r din g

con t r ibu t or s t o t h e com m u n it y”; (2) 100 m illion in t o a n “In st it u t ion a l F u n d,”

t o a llow for “t h e for m a t ion of in st it u t ion a l pa r t n er sh ips, a s well a s for gr a n t s

a n d don a t ion s t o n on pr ofit s a n d ot h er [NGOs] wit h sim ila r va lu es a s LBRY”;

a n d (3) 100 m illion in t o t h e a pt ly n a m ed “Oper a t ion a l F u n d,” t o be u sed for

“oper a t ion a l pu r poses.” See Ka u ffm a n Decl., Doc. No. 61-3 a t 5 ¶ 14.

LBRY’s co-fou n der s la r gely self-fu n ded t h eir in it ia l developm en t

effor t s, bu t t h ey did r a ise “a sm a ll a m ou n t of fu n ds fr om a n u m ber of a n gel

in vest or s.” See Def.’s Mem ., Doc. N o. 61-1 a t 5. In Sept em ber 2016, t h e

com pa n y a lso obt a in ed $500,000 in debt fin a n cin g t h r ou gh P illa r VC, a

ven t u r e ca pit a l fir m . See Ka u ffm a n Decl., Doc. No. 61-3 a t 9 ¶ 29. Sin ce t h en ,

LBRY h a s la r gely r elied on sa les a n d t r a n sfer s of LBC t o fu n d it s oper a t ion s.

See 9/28/2016 LBRY Ar t icle, Doc. No. 57-8.

To da t e, t h e com pa n y h a s spen t a ppr oxim a t ely h a lf of it s pr e-m in ed

LBC t h r ou gh va r iou s t r a n sa ct ion s. See Ka u ffm a n Decl., Doc. No. 61-3 a t 4

¶ 14. LBRY a ssign ed 2 m illion of it s pr e-m in ed LBC t o P illa r t o ext en d t h e

com pa n y’s debt fin a n cin g. See Token Issu a n ce Agr eem en t , Doc. No. 64-30. It

sold 1.7 m illion LBC t o t h r ee ot h er en t it ies: F lipside Cr ypt o, a com pa n y t h a t

iden t ifies, a cqu ir es, a n d st or es cr ypt ogr a ph ic a sset s for in vest m en t clu bs, a n d

a pa ir of on lin e t r a din g pla t for m s, Sh a peSh ift a n d Coin E x. See F in er Let t er ,

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Doc. No. 64-18 a t 4; Ka u ffm a n Dep., Doc. No. 56-7 a t 28; LBRY Qu a r t er ly

Cr edit Repor t , Doc. No. 64-12 a t 8. It sold m or e t h a n 9.8 m illion LBC t o t h e

pu blic dir ect ly t h r ou gh LBRY a pplica t ion s a n d a n ot h er 44.1 m illion LBC

t h r ou gh va r iou s digit a l a sset t r a din g pla t for m s. See Moon P a y Agr eem en t ,

Doc. No. 65-12; P l’s St a t em en t of F a ct s, Doc. No. 55-2 a t 20 ¶ ¶ 84-87. An d it

u sed m or e t h a n 142 m illion LBC t o in cen t ivize u ser s, soft wa r e developer s,

a n d soft wa r e t est er s, a s well a s com pen sa t e em ployees a n d con t r a ct or s. See

LBRY Am en ded Respon se, Doc. No. 64-17.

B . T h e E n fo r c e m e n t Ac t io n

Th e SE C br ou gh t t h is en for cem en t a ct ion in Ma r ch 2021. See Com pl.,

Doc. No. 1 a t 1. Th e a gen cy’s sole cla im is t h a t LBRY’s u n r egist er ed offer in gs

of LBC viola t e sect ion s 5(a ) a n d (c) of t h e Secu r it ies Act , 15 U.S.C. § 77e(a ),

(c). Com pl., Doc. No. 1 a t 15. Th e SE C seeks in ju n ct ive r elief, disgor gem en t of

m on ies obt a in ed t h r ou gh LBRY’s offer in gs, a n d civil pen a lt ies. Id. a t 15-16.

II. S T AN D AR D O F R E VI E W

Su m m a r y ju dgm en t is wa r r a n t ed “on ly if t h e r ecor d, con st r u ed in t h e

ligh t m ost a m ia ble t o t h e n on m ova n t , pr esen t s n o gen u in e issu e a s t o a n y

m a t er ia l fa ct a n d r eflect s t h e m ova n t ’s en t it lem en t t o ju dgm en t a s a m a t t er

of la w.” P er ea v. E dit or ia l Cu lt u r a l, In c., 13 F .4t h 43, 50 (1st Cir . 2021)

(qu ot in g Ir obe v. USDA, 890 F .3d 371, 377 (1st Cir . 2018)) (clea n ed u p). I

n eed n ot con sider fa ct u a l dispu t es im m a t er ia l t o t h e lega l issu es u n der

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r eview in r u lin g on a m ot ion for su m m a r y ju dgm en t . See An der son v. Liber t y

Lobby, In c., 477 U.S. 242, 247–48 (1986) (“[T]h e m er e exist en ce of som e

a lleged fa ct u a l dispu t e bet ween t h e pa r t ies will n ot defea t a n ot h er wise

pr oper ly su ppor t ed m ot ion for su m m a r y ju dgm en t [.]”). Wh en pa r t ies cr oss-

m ove for su m m a r y ju dgm en t , I “view ea ch m ot ion sepa r a t ely, dr a win g a ll

in fer en ces in fa vor of t h e n on m ovin g pa r t y.” See Gigu er e v. P or t Res. In c.,

927 F .3d 43, 47 (1st Cir . 2019) (qu ot in g F a dili v. Deu t sch e Ba n k Na t ’l Tr . Co.,

772 F .3d 951, 953 (1st Cir . 2014)); see a lso Ma n del v. Bost on P h oen ix, In c.,

456 F .3d 198, 205 (1st Cir . 2006) (“Th e pr esen ce of cr oss-m ot ion s for

su m m a r y ju dgm en t n eit h er dilu t es n or dist or t s t h is st a n da r d of r eview.”).

Th u s, I m u st “det er m in e wh et h er eit h er of t h e pa r t ies deser ves ju dgm en t a s a

m a t t er of la w on fa ct s t h a t a r e n ot dispu t ed.” See Adr ia In t ’l Gr p., In c. v.

F er r é Dev., In c., 241 F .3d 103, 107 (1st Cir . 2001).

III. AN AL YS I S

To est a blish a pr im a fa cie viola t ion of Sect ion 5 of t h e Secu r it ies Act ,

t h e SE C m u st pr ove t h a t LBRY offer ed or sold secu r it ies in in t er st a t e

com m er ce wit h ou t filin g a r egist r a t ion st a t em en t . See SE C v. Gen Au dio In c.,

32 F .4t h 902, 939 (10t h Cir . 2022); see a lso SE C v. Ka h lon , 873 F .3d 500, 504

(5t h Cir . 2017). LBRY does n ot ch a llen ge t h e SE C’s con t en t ion t h a t it offer ed

a n d sold LBC in in t er st a t e com m er ce wit h ou t r egist er in g it s offer in gs wit h

t h e SE C. Nor does it a r gu e t h a t it s pa st offer in gs fa ll wit h in a n exem pt ion t o

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t h e r egist r a t ion r equ ir em en t . Th u s, t h e on ly issu es im pedin g a fin din g t h a t

LBRY viola t ed Sect ion 5 a r e LBRY’s cla im t h a t it did n ot offer LBC a s a

secu r it y a n d it s a r gu m en t t h a t it wa s n ot given fa ir n ot ice t h a t it n eeded t o

r egist er it s offer in gs. I a ddr ess ea ch issu e in t u r n .

A. D id L B R Y O ffe r L B C a s a S e c u r i t y ?

Wh en Con gr ess a dopt ed t h e Secu r it ies Act , “it en a ct ed a defin it ion of

‘secu r it y’ su fficien t ly br oa d t o en com pa ss vir t u a lly a n y in st r u m en t t h a t m igh t

be sold a s a n in vest m en t .” Reves v. E r n st & You n g, 494 U.S. 56, 61 (1990).

On e su ch in st r u m en t is a n “in vest m en t con t r a ct ,” wh ich t h e Su pr em e Cou r t

defin ed in SE C v. W.J . H owey Co. a s “a con t r a ct , t r a n sa ct ion or sch em e

wh er eby a per son in vest s h is m on ey in a com m on en t er pr ise a n d is led t o

expect pr ofit s solely fr om t h e effor t s of t h e pr om ot er or a t h ir d pa r t y.” 328

U.S. 293, 298-99 (1946); see a lso SE C v. SG Lt d., 265 F .3d 42, 46 (1st Cir .

2001). Con sist en t wit h t h e br oa d r ea ch of t h e Secu r it ies Act , “[t ]h is defin it ion

‘em bodies a flexible r a t h er t h a n a st a t ic pr in ciple, on e t h a t is ca pa ble of

a da pt a t ion t o m eet t h e cou n t less a n d va r ia ble sch em es devised by t h ose wh o

seek t h e u se of t h e m on ey of ot h er s on t h e pr om ise of pr ofit s.’” SE C v.

E dwa r ds, 540 U.S. 389, 393 (2004) (qu ot in g H owey, 328 U.S. a t 299). Th e

focu s of t h e in qu ir y is on t h e object ive econ om ic r ea lit ies of t h e t r a n sa ct ion

r a t h er t h a n t h e for m t h a t t h e t r a n sa ct ion t a kes. Un it ed H ou s. F ou n d. v.

F or m a n , 421 U.S. 837, 848 (1975); see a lso Wa r field v. Ala n iz, 569 F .3d 1015,

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1021 (9t h Cir . 2009) (“Un der H owey, cou r t s con du ct a n object ive in qu ir y in t o

t h e ch a r a ct er of t h e in st r u m en t or t r a n sa ct ion offer ed ba sed on wh a t t h e

pu r ch a ser s wer e ‘led t o expect .’”).

Th e F ir st Cir cu it h a s br oken t h e H owey t est in t o t h r ee pa r t s: “(1) t h e

in vest m en t of m on ey (2) in a com m on en t er pr ise (3) wit h a n expect a t ion of

pr ofit s t o be der ived solely fr om t h e effor t s of t h e pr om ot er or a t h ir d pa r t y.”

SG Lt d., 265 F .3d a t 46. H er e, on ly t h e t h ir d com pon en t of t h e H owey t est is

in dispu t e. Th u s, t h e issu e t o be decided is wh et h er t h e econ om ic r ea lit ies

su r r ou n din g LBRY’s offer in gs of LBC led in vest or s t o h a ve “a r ea son a ble

expect a t ion of pr ofit s t o be der ived fr om t h e en t r epr en eu r ia l or m a n a ger ia l

effor t s of ot h er s.”2 See F or m a n , 421 U.S. a t 852. I a n a lyze t h e eviden ce t h a t

bea r s on t h is issu e by fir st exa m in in g LBRY’s r epr esen t a t ion s t o pr ospect ive

pu r ch a ser s a n d t h e com pa n y’s bu sin ess m odel. I t h en t u r n t o LBRY’s

2 In H owey, t h e Cou r t st a t ed t h a t t h e expect ed pr ofit s fr om a n in vest m en t

m u st be du e “solely” t o t h e effor t s of a pr om ot er or a t h ir d pa r t y. 328 U.S. a t
299 (em ph a sis a dded). “Th e cou r t s of a ppea ls h a ve been u n a n im ou s in
declin in g t o give lit er a l m ea n in g t o t h e wor d ‘solely’ in ” a pplyin g H owey. SG
Lt d., 265 F .3d a t 55. I join t h eir n u m ber . Th e r equ ir em en t is in st ea d sa t isfied
wh en “t h e effor t s m a de by t h ose ot h er t h a n t h e in vest or a r e t h e u n den ia bly
sign ifica n t on es, t h ose essen t ia l m a n a ger ia l effor t s wh ich a ffect t h e fa ilu r e or
su ccess of t h e en t er pr ise.” Id. (qu ot in g SE C v. Glen n W. Tu r n er E n t er s., 474
F .2d 476, 482 (9t h Cir . 1973)); a ccor d Un it ed St a t es v. Leon a r d, 529 F .3d 83,
88 n .6 (2d Cir . 2008).

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a r gu m en t t h a t it h a s n ot offer ed LBC a s a secu r it y beca u se som e pu r ch a ser s

a cqu ir ed LBC for u se on t h e LBRY Net wor k.

1. L B R Y’s R e p r e s e n t a t io n s t o P o t e n t ia l P u r c h a s e r s

Th e SE C iden t ifies m u lt iple st a t em en t s by LBRY t h a t it cla im s led

pot en t ia l in vest or s t o r ea son a bly expect t h a t LBC wou ld gr ow in va lu e a s t h e

com pa n y con t in u ed t o over see t h e developm en t of t h e LBRY Net wor k. LBRY

m in im izes t h e sign ifica n ce of t h ese st a t em en t s, a n d poin t s t o it s m a n y

discla im er s t h a t it did n ot in t en d for LBC t o be pu r ch a sed a s a n in vest m en t ,

bu t t h e SE C is cor r ect . LBRY h a s - a t key m om en t s a n d despit e it s

pr ot est a t ion s - been a cu t ely a wa r e of LBC’s pot en t ia l va lu e a s a n in vest m en t .

An d it m a de su r e pot en t ia l in vest or s wer e t oo.

Wh en LBRY la u n ch ed t h e LBRY Net wor k in J u n e 2016, LBC’s m a r ket

ca pit a liza t ion wa s a h ea lt h y $140 m illion . See 7/15/2016 LBRY Ar t icle, Doc.

No. 57-11. Th is, despit e t h e Net wor k’s r ela t ive in fa n cy a n d lim it ed u sa bilit y.

By t h e followin g m on t h , LBC’s m a r ket ca pit a liza t ion h a d ba lloon ed t o $1.2

billion . Id. In r espon se, LBRY issu ed a blog post r eflect in g on LBC's

skyr ocket in g va lu e. See id.

LBRY ca pt ion ed t h e post : “1.2B Ma r ket Ca p a n d We Don ’t Ca r e.” Id. It

bega n by t ou t in g t h e r a pid gr owt h in LBC’s va lu e, bu t fr a n kly a ckn owledged

t h a t it cou ld n ot sa y wh et h er t h e cu r r en t va lu a t ion wa s ju st ified. Id. At t h a t

poin t , on ly t h r ee videos wer e a va ila ble on t h e blockch a in , ea ch pr odu ced by

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LBRY it self. See id. An d LBRY’s st a ff wer e h a r d a t wor k “fr a n t ica lly

debu ggin g” a n d developin g it s pr odu ct . Id. Wh a t LBRY did cla im t o kn ow

t h ou gh wa s “t h a t t h e lon g-t er m va lu e pr oposit ion of LBRY is t r em en dou s, bu t

a lso depen den t on ou r t ea m st a yin g focu sed on t h e t a sk a t h a n d: bu ildin g t h is

t h in g.” Id. It t h en closed t h e post by a n n ou n cin g a policy of n eu t r a lit y wit h

r espect t o LBC's pr ice bu t pla in ly st a t in g t h a t “[o]ver t h e lon g-t er m , t h e

in t er est s of LBRY a n d t h e h older s of [LBC] a r e a lign ed.” Id.

In Au gu st 2016, t h e COO of LBRY, J osh F in er , em a iled a pot en t ia l

in vest or expla in in g t h a t t h e com pa n y wa s “cu r r en t ly n egot ia t in g pr iva t e

pla cem en t s of LBC wit h sever a l [ot h er ] in vest or s” a n d a sked t h e r ecipien t t o

wr it e h im ba ck “if t h er e is in t er est ” so t h e t wo cou ld “ch a t .” See COO E m a il,

Doc. No. 59-7. 3 Th e t h r u st of t h e em a il (su bject lin e: “LBRY Cr edit s Now

Tr a din g – LBC”) is clea r . See id. Aft er br iefly n ot in g t h a t t h e pla t for m wa s u p

a n d r u n n in g, t h e COO expla in ed h ow LBC a r e bein g t r a ded on “m a jor cr ypt o

exch a n ges” a n d t h a t t r a din g volu m e is m ovin g a t a h ea lt h y clip. See id. Th e

“oppor t u n it y is obviou s,” wr ot e t h e COO, “bu y a bu n ch of cr edit s, pu t t h em

a wa y sa fely, a n d h ope t h a t in 1-3 yea r s we’ve a ppr ecia t ed even 10% of h ow

3 LBRY dispu t es t h e SE C’s cla im t h a t t h e r ecipien t wa s a n in vest or bu t does

n ot sa y wh o t h e r ecipien t a ct u a lly wa s. See Def.’s F a ct Respon ses, Doc. No.
74-25 a t 7 ¶ 65.

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m u ch Bit coin h a s in t h e pa st few yea r s.” Id. H e wr a ps u p by pit ch in g LBRY’s

com m it m en t t o bu ildin g it s Net wor k: “[i]f ou r pr odu ct h a s t h e u t ilit y we pla n ,

t h e cr edit s sh ou ld a ppr ecia t e a ccor din gly.” Id.

By Novem ber 2016, LBC’s pr ice wa s down , a n d som e LBC in vest or s

wer e get t in g jit t er y. J er em y Ka u ffm a n , LBRY’s CE O, pu blish ed a blog post

t it led “Acr ypt ypica l: Th e CE O of LBRY on t h e pr ice of LBC,” ou t lin in g h is

view of LBRY’s con dit ion a n d pr ovidin g “a ca n on ica l a n swer t o qu est ion s

a bou t t h e pr ice of LBC.” See 11/15/2016 Ar t icle, Doc. No. 57-21. LBC’s pr ice

wa s low, h e con t en ded, beca u se of sim ple econ om ics: t h e su pply of LBC

en t er in g cir cu la t ion t h r ou gh m in in g wa s ou t pa cin g t h e dem a n d for n ew

t oken s. See id. An d dem a n d wa s low beca u se, a t t h a t poin t , “t h er e [wa s] n o

r ea son t o bu y” LBC. See id. Wh en LBRY la u n ch ed, Ka u ffm a n expla in ed, it

wa s “t h e ba r est , m in im u m pr oof-of-con cept [a pplica t ion ] possible.” Id.

Alt h ou gh it h a d on ly been a few m on t h s sin ce t h e la u n ch , LBRY st ill st r essed

it s lon g-t er m goa l of “bu il[din g] a pr odu ct t h a t is com pellin g en ou gh t o ch a n ge

people’s h a bit s,” r epla cin g “You Tu be” a n d “Am a zon .” See id. An d wh ile

in vest or s wer e u n lik ely t o m a ke a “qu ick bu ck,” Ka u ffm a n en cou r a ged t h em

t o “h old on t o [t h eir LBC] (or spen d it t o bu y som e of [LBRY’s] gr ea t con t en t

. . . .).” Id. LBRY’s m essa ge wa s clea r : We a r e a wor k in pr ogr ess. LBC

r eflect s t h a t . Bea r wit h u s.

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In a n ot h er com m u n ica t ion , t h is t im e on Reddit , a u ser wh o wa s “t r yin g

t o do [t h eir ] r esea r ch befor e pu t t in g in [t h eir ] m on ey” a sked som e gen er a l

qu est ion s a bou t h ow LBRY wou ld m a n a ge it s h oldin gs of LBC. See Reddit

Th r ea d, Doc. N o. 57-20. In r espon se, LBRY’s Com m u n it y Ma n a ger expla in ed

t h a t t h e on ly wa y LBC will be “wor t h som et h in g in t h e fu t u r e is if LBRY

deliver s on t h eir pr om ises t o cr ea t e a r evolu t ion a r y wa y t o sh a r e a n d

m on et ize con t en t .” See id. Th e t h r ea d a lso in clu des a n ot h er Reddit or a dvisin g

t h e com m u n it y m a n a ger on wh a t in for m a t ion “wou ld h elp people wit h t h eir

in vest m en t decision s.” See id.

An ot h er r eleva n t r epr esen t a t ion ca m e in a n in t er view wit h Mike Vin e,

LBRY’s “Tech n ology E va n gelist ”. See Vin e In t er view, Doc. No. 57-19. Vin e

expla in ed h ow t h e fu t u r e “va lu e of LBRY cr edit s” wou ld depen d on “t h e

su ccess of ou r m edia m a r ket pla ce.” See id. Wh en t h e in t er viewer a sk ed h ow

LBRY wou ld k eep “st olen [,] . . . u n sa vor y, or down r igh t illega l” con t en t fr om

t h e pr ot ocol, Vin e’s r espon se bet r a yed LBRY’s power br okin g r ole wit h in it s

ecosyst em by expla in in g t h a t LBRY m igh t be a ble t o u se it s “posit ion a s t h e

‘m a r ket m a ker ’ of [LBC] t o ba sica lly m a ke it m or e expen sive for people t o

a bu se t h e n et wor k.” See id.

In J a n u a r y 2018, Ka u ffm a n wr ot e fu r t h er on t h e ben efit s of blockch a in

t ech n ology in a n ot h er essa y en t it led “Blockch a in is Love, Blockch a in is Life.”

See 1/10/2018 LBRY Ar t icle, Doc. No. 57-16. Th er e, h e wr ot e a bou t wh a t h e

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ca lled t h e “in cen t ive pr oblem []” in developin g open -sou r ce a lt er n a t ives t o

exist in g t ech n ologies t h a t a r e con t r olled by pr iva t e com pa n ies. See id. On e

solu t ion t o t h is pr oblem , a s Ka u ffm a n sa w it , wa s t o be fou n d in blockch a in

t ech n ology, wh ich a llowed for blockch a in t oken s t o be u sed t o r ea lign

in cen t ives. See id. Beca u se a blockch a in t oken “h a s va lu e in pr opor t ion t o t h e

u sa ge a n d su ccess of t h e n et wor k,” developer s a r e in cen t ivized t o wor k t o

develop a n d pr om ot e n ew u ses for block ch a in . Id. As Ka u ffm a n pu t it :

It m ea n s t h a t t h e people wh o discover a n d u t ilize a n ew pr ot ocol

or n et wor k wh en it ’s ju st get t in g off t h e gr ou n d ca n r ea p
su bst a n t ia l va lu e by bein g t h er e fir st . Th is solves t h e in cen t ive
pr oblem s a r ou n d bein g a fir st -m over a n d soft en s t h e pa in of
u sin g a ser vice t h a t pr oba bly won ’t be a s fea t u r e-r ich or slick a s
est a blish ed com pet it or s’ opt ion s. It pr ovides a sou r ce of fu n din g
for t h e developm en t of t h e pr ot ocol. Th e cr ea t or s ca n u se t h e
t oken t o pa y for t h e sa la r ies a n d equ ipm en t r equ ir ed t o get it
st a r t ed.

Id.

An d in yet a n ot h er post , t h is t im e in Oct ober 2020, LBRY pr ovided

a n ot h er posit ive u pda t e. See 10/14/2020 LBRY Ar t icle, Doc. No. 57-24. It

expla in ed t h a t it st ill sa w it self a s m eet in g t h e con su m er “dem a n d for a u ser -

own ed a n d con t r olled a lt er n a t ive t o You Tu be a n d big t ech .” See id. In deed, it s

wor k cr ea t in g a “com pellin g t oken econ om y cen t er ed a r ou n d digit a l con t en t

exch a n ge” wa s st ill “im m in en t ly a ch ieva ble” wit h ju st “som e t wea k s.” See id.

LBRY a lso t ou t ed t h e en or m ou s pot en t ia l it sa w in con t in u in g t o develop it s

a pplica t ion on it s blockch a in . Ot h er blockch a in com pa n ies, t h e post a sser t ed,

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a r e for ced t o r ely on “som e t h ir d-pa r t y” t o “m a gicly [sic] bu ild a wor ld-cla ss

a pplica t ion ” on t h eir blockch a in s. See id. Not LBRY. An d sin ce “[a ]pplica t ion s

u sed by billion s of people ca n be wor t h t r illion s of dolla r s,” LBRY wa s

u n iqu ely poised t o “deliver t h a t va lu e” by “own [in g] t h e wh ole st a ck.” See id.

Th ese st a t em en t s a r e r epr esen t a t ive of LBRY’s over a ll m essa gin g

a bou t t h e gr owt h pot en t ia l for LBC, a n d t h u s t h e SE C is cor r ect t h a t

pot en t ia l in vest or s wou ld u n der st a n d t h a t LBRY wa s pit ch in g a specu la t ive

va lu e pr oposit ion for it s digit a l t oken . LBRY’s m essa gin g a m ou n t s t o

pr ecisely t h e “n ot -ver y-su bt le for m of econ om ic in du cem en t ” t h e F ir st Cir cu it

iden t ified in SG a s eviden cin g H owey’s “expect a t ion of pr ofit s.” See SG Lt d.,

265 F .3d a t 54-55.

LBRY does n ot disa vow it s st a t em en t s r ega r din g LBC’s va lu e or pr ice,

bu t n ot es t h a t t h e st a t em en t s t h e SE C iden t ifies con st it u t e on ly 0.25% of “t h e

t ot a l n u m ber of post s a n d m essa ges t h e com pa n y h a s pu blish ed sin ce it s

in cept ion .” See Def.’s Obj., Doc. No. 74 a t 5. Bu t t h is st a t ist ic r elies on a

m islea din g den om in a t or . Of cou r se, like m a n y ot h er com pa n ies, LBRY

r egu la r ly pu blish es st a t em en t s on a r a n ge of t opics, a n d cou ld n ot a r gu e t h a t

t h e 8,805 t weet s it iden t ified h a vin g post ed, see id., a ll per t a in in equ a l

m ea su r e t o it s views of LBC’s lon g-t er m va lu e pr oposit ion . Sin ce LBRY

m a kes n o effor t t o t a lly t h e n u m ber of com pa r a ble st a t em en t s t o t h ose

iden t ified by t h e SE C, it s a r gu m en t la ck s weigh t .

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LBRY a lso r elies on t h e fa ct t h a t it in for m ed som e pot en t ia l pu r ch a ser s

of LBC t h a t t h e com pa n y wa s n ot offer in g it s t ok en a s a n in vest m en t . Bu t a

discla im er ca n n ot u n do t h e object ive econ om ic r ea lit ies of a t r a n sa ct ion . See

SE C v. Telegr a m Gr p. In c., 448 F . Su pp.3d 352, 365 (S.D.N .Y. 2020) (cit in g

SG Lt d., 265 F .3d a t 54) (“Discla im er s, if con t r a r y t o t h e a ppa r en t econ om ic

r ea lit y of a t r a n sa ct ion , m a y be con sider ed by t h e [c]ou r t bu t a r e n ot

disposit ive.”).

2. L B R Y’s B u s in e s s Mo d e l

As I ju st la id ou t , LBRY m a de n o secr et in it s com m u n ica t ion s wit h

pot en t ia l in vest or s t h a t it expect ed LBC t o gr ow in va lu e t h r ou gh it s

m a n a ger ia l a n d en t r epr en eu r ia l effor t s. Bu t even if it h a d n ever explicit ly

br oa dca st it s views on t h e su bject , a n y r ea son a ble in vest or wh o wa s fa m ilia r

wit h t h e com pa n y’s bu sin ess m odel wou ld h a ve u n der st ood t h e con n ect ion .

F r om it s in cept ion , LBRY’s pr ofit a bilit y t u r n ed on it s a bilit y t o gr ow

t h e va lu e of LBC by in cr ea sin g u sa ge of t h e LBRY Net wor k. As Ka u ffm a n

expla in ed in a n Oct ober 2016 in for m a l bu sin ess pla n , LBC wa s t h e m ea n s by

wh ich LBRY a n d ot h er ea r ly a dopt er s wou ld be a ble t o pr ofit a s u se of t h e

n et wor k in cr ea sed. See LBRY P la n , Doc. No. 62-2 a t 9. Th is wa s beca u se

“[e]a ch per cen t a ge of [LBC] ca n be t h ou gh t of a s h a vin g a va lu e pr opor t ion a l

t o t h e su m of a ll in for m a t ion t r a n sa ct ed t h r ou gh t h e n et wor k.” Id. In ot h er

wor ds, a s dem a n d for in for m a t ion st or ed on t h e blockch a in in cr ea sed, so t oo

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wou ld LBC’s va lu e. Accor din gly, Ka u ffm a n r ea son ed, “[g]iven t h is sit u a t ion ,

t h e m ost r ea son a ble pa t h t o pr ofit is t o r eser ve a por t ion of t h e

cr ypt ocu r r en cy.” Id. La t er in t h e sa m e pla n , h e discu ssed t h e com pa n y’s

liqu ida t ion va lu e by st a t in g “[s]in ce LBRY’s m ost sign ifica n t a sset will be it s

cr edit s, it cou ld sim ply liqu ify t h ese cr edit s a t a r et u r n of 10-10,000x on a n y

in vest m en t .” Id. a t 10.

Sim ila r ly, in a post on it s websit e t it led “An swer s t o Big Qu est ion s

F r om ou r Reddit AMA,” LBRY r espon ded t o t h e qu est ion “H ow does t h e

com pa n y beh in d LBRY m a k e m on ey?” by st a t in g:

Th e LBRY pr ot ocol h a s a bu ilt -in digit a l cu r r en cy t h a t a llows it t o

fu n ct ion , ca lled LBRY Cr edit s. Th ese Cr edit s a r e ver y sim ila r t o
bit coin s. H a vin g a bu ilt -in digit a l cu r r en cy cr ea t es a n oppor t u n it y
for a n ew kin d of bu sin ess t h a t h a s n ever exist ed: t h e pr ot ocol-
fir st en t er pr ise . . . LBRY In c. h a s r eser ved 10% of a ll LBRY
Cr edit s t o fu n d con t in u ed developm en t a n d pr ovide pr ofit for t h e
fou n der s. Sin ce Cr edit s on ly ga in va lu e a s t h e u se of t h e pr ot ocol
gr ows, t h e com pa n y h a s a n in cen t ive t o con t in u e developin g t h is
open -sou r ce pr oject .

9/28/2016 LBRY Ar t icle, Doc. No. 57-8.

Th e pr oblem for LBRY is n ot ju st t h a t a r ea son a ble pu r ch a ser of LBC

wou ld u n der st a n d t h a t t h e t oken s bein g offer ed r epr esen t ed in vest m en t

oppor t u n it ies - even if LBRY n ever sa id a wor d a bou t it . It is t h a t , by

r et a in in g h u n dr eds of m illion s of LBC for it self, LBRY a lso sign a led t h a t it

wa s m ot iva t ed t o wor k t ir elessly t o im pr ove t h e va lu e of it s blockch a in for

it self a n d a n y LBC pu r ch a ser s. Th is st r u ct u r e, wh ich a n y r ea son a ble

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pu r ch a ser wou ld u n der st a n d, wou ld lea d pu r ch a ser s of LBC t o expect t h a t

t h ey t oo wou ld pr ofit fr om t h eir h oldin gs of LBC a s a r esu lt of LBRY’s

a ssidu ou s effor t s.

Sim ply pu t , by in t er t win in g LBRY’s fin a n cia l fa t e wit h t h e com m er cia l

su ccess of LBC, LBRY m a de it obviou s t o it s in vest or s t h a t it wou ld wor k

diligen t ly t o develop t h e Net wor k so t h a t LBC wou ld in cr ea se in va lu e. As

LBRY sa id, “[o]ver t h e lon g-t er m , t h e in t er est s of LBRY a n d t h e h older s of

Cr edit s a r e a lign ed.” See 7/15/2016 LBRY Ar t icle, Doc. No. 57-11. Th e SE C’s

bu r den is m a de a ll t h e ea sier by st a t em en t s LBRY m a de a bou t it s

m a n a ger ia l effor t s, like h ow “t h e lon g-t er m va lu e pr oposit ion of LBRY is . . .

depen den t on ou r t ea m st a yin g focu sed on t h e t a sk a t h a n d: bu ildin g t h is

t h in g.” See id. By it s own a ccou n t , LBRY expen ded sign ifica n t m a n a ger ia l

effor t s t o develop it s Net wor k a n d in cr ea se t h e va lu e of LBC.

3. C o n s u m p t iv e U s e s fo r L B C

LBRY’s pr im a r y r espon se t o t h e SE C’s cla im st a r t s wit h t wo gen er a lly

u n con t est ed fa ct s: (1) LBC is a u t ilit y t oken design ed for u se on t h e LBRY

Blockch a in , a n d (2) som e u n kn own n u m ber of pu r ch a ser s of LBC a cqu ir ed it

a t lea st in pa r t wit h t h e in t en t ion of u sin g it r a t h er t h a n h oldin g it a s a n

in vest m en t . Bu ildin g fr om t h er e, LBRY lea ps t o t h e con clu sion t h a t LBC

ca n n ot be a secu r it y even if LBRY offer ed it a s a n in vest m en t . LBRY is

m ist a ken a bou t bot h t h e fa ct s a n d t h e la w.

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Not h in g in t h e ca se la w su ggest s t h a t a t oken wit h bot h con su m pt ive

a n d specu la t ive u ses ca n n ot be sold a s a n in vest m en t con t r a ct . Despit e

LBRY’s in sist en ce t o t h e con t r a r y, I ca n n ot r eject t h e SE C’s con t en t ion t h a t

LBRY offer ed LBC a s a secu r it y sim ply beca u se som e LBC pu r ch a ses wer e

m a de wit h con su m pt ive in t en t . Wer e it ot h er wise, t h e Secu r it ies Act wou ld be

u n a ble t o a da pt t o t h e “cou n t less a n d va r ia ble sch em es devised by t h ose wh o

seek t h e u se of t h e m on ey of ot h er s on t h e pr om ise of pr ofit s” wh er ever a

t oken h eld som e con su m pt ive u t ilit y. See H owey, 328 U.S. a t 299.

Accor din gly, st a t em en t s fr om a su bset of LBC h older s t h a t t h ey pu r ch a sed

LBC for u se on t h e LBRY Blockch a in is of lim it ed r eleva n ce in det er m in in g

wh et h er LBRY offer ed it a s a secu r it y. See Wa r field, 569 F .3d a t 1021

(“[W]h ile t h e su bject ive in t en t of t h e pu r ch a ser s m a y h a ve som e bea r in g on

t h e issu e of wh et h er t h ey en t er ed in t o in vest m en t con t r a ct s, we m u st focu s

ou r in qu ir y on wh a t t h e pu r ch a ser s wer e offer ed or pr om ised.”).

In su m m a r y, wh a t t h e eviden ce in t h e r ecor d discloses is t h a t LBRY

pr om ot ed LBC a s a n in vest m en t t h a t wou ld gr ow in va lu e over t im e t h r ou gh

t h e com pa n y’s developm en t of t h e LBRY Net wor k . Wh ile som e u n kn own

n u m ber of pu r ch a ser s m a y h a ve a cqu ir ed LBC in pa r t for con su m pt ive

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pu r poses, t h is does n ot ch a n ge t h e fa ct t h a t t h e object ive econ om ic r ea lit ies of

LBRY’s offer in gs of LBC est a blish t h a t it wa s offer in g it a s a secu r it y. 4

B . D id L B R Y R e c e iv e F a ir N o t ic e ?

LBRY a r gu es t h a t I sh ou ld n on et h eless den y t h e SE C’s m ot ion beca u se

it did n ot r eceive fa ir n ot ice t h a t it s offer in gs wer e su bject t o t h e secu r it ies

la ws. In pr essin g t h is a r gu m en t , LBRY h a s a ba n don ed a n y br oa d cla im t h a t

it la cked fa ir n ot ice of t h e wa y in wh ich t h e H owey t est a pplies t o digit a l

t oken s in gen er a l. Def.’s Obj., Doc. No. 74 a t 24. In st ea d, it com pla in s t h a t it

la cked fa ir n ot ice beca u se, u n t il t h e SE C br ou gh t t h is a ct ion , “t h e

Com m ission h ist or ica lly a n d con sist en t ly focu sed it s gu ida n ce, a s well a s it s

en for cem en t effor t s, exclu sively on t h e issu a n ce of digit a l a sset s in t h e

con t ext of a n [In it ia l Coin Offer in g] ICO.” Id.

Th e pr in cipa l pr oblem wit h LBRY’s fa ir n ot ice a r gu m en t is t h a t it

offer s n ot h in g m or e t o su ppor t it s posit ion t h a n it s ba ld cla im t h a t t h is is t h e

fir st ca se in wh ich t h e SE C h a s a t t em pt ed t o en for ce t h e r egist r a t ion

r equ ir em en t a ga in st a n issu er of digit a l t oken s t h a t did n ot con du ct a n ICO.

4 LBRY a r gu es in t h e a lt er n a t ive t h a t it sh ou ld n ot be r equ ir ed t o r egist er

fu t u r e offer in gs of LBC even if it s pr ior offer in gs wer e su bject t o Sect ion 5’s
r egist r a t ion r equ ir em en t . I declin e t o a ddr ess t h is a r gu m en t on t h e pr esen t
r ecor d beca u se LBRY h a s n ot expla in ed wh y possible fu t u r e offer in gs of LBC
sh ou ld be t r ea t ed differ en t ly fr om t h e com pa n y’s pa st offer in gs.

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LBRY does n ot poin t t o a n y specific st a t em en t by t h e SE C su ggest in g t h a t

com pa n ies n eed on ly com ply wit h t h e r egist r a t ion r equ ir em en t if t h ey

con du ct a n ICO. Nor does LBRY offer a n y per su a sive r ea din g of H owey t h a t

wou ld ca u se a r ea son a ble issu er t o con clu de t h a t on ly ICOs a r e su bject t o t h e

r egist r a t ion r equ ir em en t . Th e t est ou t lin ed in H owey is n ecessa r ily a fa ct -

specific on e, in wh ich n o sin gle fa ct will likely be disposit ive. Wh ile

pa r t icipa t ion in a n ICO m a y be r eleva n t t o t h e a n a lysis, it will n ot det er m in e

t h e ou t com e in a ca se like t h is, wh er e t h e u n dispu t ed eviden ce lea ves n o

dou bt t h a t LBRY offer ed a n d sold LBC a s a secu r it y.

LBRY r elies on t h e Secon d Cir cu it ’s decision in Upt on v. SE C for t h e

pr oposit ion t h a t t h e SE C m a y n ot im pose a sa n ct ion for viola t in g t h e

secu r it ies la ws “pu r su a n t t o a su bst a n t ia l ch a n ge in it s en for cem en t policy

t h a t wa s n ot r ea son a bly com m u n ica t ed t o t h e pu blic.” See 75 F .3d 92, 98 (2n d

Cir . 1996). Bu t , a s t h e SE C n ot es, t h e fa ct s of Upt on bea r n o r esem bla n ce t o

t h e pr esen t ca se. Upt on in volved a n a t t em pt by t h e SE C t o sa n ct ion t h e CF O

of a br ok er a ge fir m for viola t in g a n SE C r u le t h a t est a blish ed a for m u la for

set t in g t h e a m ou n t of m on ey t h a t t h e br oker a ge wa s r equ ir ed t o m a in t a in in

a cu st om er r eser ve a ccou n t . Id. a t 93. Alt h ou gh it wa s u n dispu t ed t h a t t h e

br oker a ge h a d a t a ll t im es com plied wit h t h e “lit er a l t er m s” of t h e r u le, a n

a dm in ist r a t ive la w ju dge r elied on a n ovel in t er pr et a t ion of t h e r u le by t h e

SE C t o con clu de t h a t t h e CF O cou ld be sa n ct ion ed. Id. a t 94-96. Beca u se t h e

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SE C did n ot give pu blic n ot ice of it s n ew in t er pr et a t ion u n t il a ft er t h e

br oker a ge h a d en ded it s offen sive pr a ct ice, t h e Secon d Cir cu it va ca t ed t h e

sa n ct ion im posed by t h e Com m ission . Id. a t 98.

Th e pr esen t ca se is obviou sly qu it e differ en t fr om t h e pr oblem t h e cou r t

con fr on t ed in U pt on . Th e SE C h a s n ot ba sed it s en for cem en t a ct ion h er e on a

n ovel in t er pr et a t ion of a r u le t h a t by it s t er m s does n ot expr essly pr oh ibit t h e

r eleva n t con du ct . In st ea d, t h e SE C h a s ba sed it s cla im on a st r a igh t for wa r d

a pplica t ion of a ven er a ble Su pr em e Cou r t pr eceden t t h a t h a s been a pplied by

h u n dr eds of feder a l cou r t s a cr oss t h e cou n t r y over m or e t h a n 70 yea r s. Wh ile

t h is m a y be t h e fir st t im e it h a s been u sed a ga in st a n issu er of digit a l t oken s

t h a t did n ot con du ct a n ICO, LBRY is in n o posit ion t o cla im t h a t it did n ot

r eceive fa ir n ot ice t h a t it s con du ct wa s u n la wfu l.

I V. CONCLUSION

As I h a ve expla in ed, t h e on ly issu es r a ised by t h e pa r t ies’ cr oss-m ot ion s

for su m m a r y ju dgm en t a r e wh et h er LBRY offer ed LBC a s a secu r it y a n d

wh et h er LBRY r eceived fa ir n ot ice t h a t it n eeded t o r egist er it s offer in gs.

Beca u se n o r ea son a ble t r ier of fa ct cou ld r eject t h e SE C’s con t en t ion t h a t

LBRY offer ed LBC a s a secu r it y, a n d LBRY does n ot h a ve a t r ia ble defen se

t h a t it la cked fa ir n ot ice, t h e SE C is en t it led t o ju dgm en t . Th e SE C’s Mot ion

for Su m m a r y J u dgm en t (Doc. No. 55) is gr a n t ed, a n d LBRY’s Mot ion for

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Su m m a r y J u dgm en t (Doc. N o. 61) is den ied. Th e Cler k sh a ll sch edu le a

st a t u s con fer en ce t o discu ss t h e pr ocess for r esolvin g a n y r em a in in g issu es.

SO ORDE RE D.

/s/ P a u l J . Ba r ba dor o
P a u l J . Ba r ba dor o
Un it ed St a t es Dist r ict J u dge

Novem ber 7, 2022

cc: Cou n sel of Recor d

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