Mar 25, 2024 - Business

Texas apparel company hits SEC with preemptive lawsuit over airdropped token

Illustration of a sweat drop on the eagle featured on the SEC logo.

Illustration: Lindsey Bailey/Axios

A small apparel company is suing the Securities and Exchange Commission in Texas federal court before it's even heard a direct word from the agency.

Why it matters: The move is part of an evolving legal strategy for the crypto industry that strikes back at what it believes is an unlawful pattern of enforcement actions, and seeks to compel the regulator to create a clear set of rules.

Between the lines: Waco-based Beba, which sells backpacks and other travel goods online, filed for what's known as declaratory judgment Monday, one in which the court would state its opinion on a particular matter before any legal injury occurs.

  • That matter relates to Beba's creation of tokens (which could be exchanged for exclusive merchandise), and a recent free distribution of them to crypto wallets in what's known as an airdrop.
  • It plans to continue doing more of both.

Zoom in: What its lawsuit argues is that an airdrop — where there is no "common enterprise" between the issuer and the recipients — is not a securities transaction.

  • And a token with no reasonable expectation of profit based on the effort of others, is not an investment contract.

The lawsuit's second claim, on which the decentralized finance advocacy group DeFi Education Fund is joining as co-plaintiff, asserts that the SEC adopted a new policy — without notice — since chairman Gary Gensler's 2021 appointment.

  • That would mean the SEC violated the Administrative Procedures Act — the same thing that Coinbase is arguing in a different court.
  • "Based on its new policy, the SEC drastically increased the number of enforcement actions — often taking contradictory legal theories along the way — it brought against industry participants," the suit reads.

Flashback: Beba's case follows another Texas crypto company/industry group lawsuit filed in a U.S. district court under the Fifth Circuit Court of Appeals just last month.

  • Unlike that one, though, and the ones involving the major crypto exchanges, Beba confronts the SEC as a token issuer.

What we're watching: While the case is small, discovery stands to be interesting given what the lawsuit asserts, especially on its second claim.

Fun fact: The case is also set in a venue that stands to be the higher ground crypto needs to challenge the SEC under the Biden administration — more than two-thirds of the judges in the 5th Circuit are Republican-appointed.

Our thought bubble: An interesting twist would be if the SEC argues that the lawsuit should be dismissed altogether because what Beba is doing is not securities transaction... because that would count as a win.

Editor's note: This story was corrected to say the prior case involving a Texas crypto company was filed in district court under the jurisdiction of the Fifth Circuit Court of Appeals, not with the appeals court directly.

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