A consortium of legal experts from top U.S. law schools are backing Coinbase in its lawsuit with the Securities and Exchange Commission (SEC), arguing that the latter has the wrong interpretation of what constitutes an “investment contract.”
In an amicus brief filed on Friday, six professors – from Fordham Law School, Yale Law School, the University of Chicago Law, and others – offered their analysis on how the term was originally interpreted in S.E.C. v. W.J. Howey Co, a 1946 case that set legal precedent for how securities are identified today.
As is frequently cited by SEC chairman Gary Gensler, the “Howey Test” states that a financial asset is a security if it entails (1) an investment of money (2) in a common enterprise (3) with an expectation of profits (4) based on the expectations of others.
The law professors, however, observed the development of the term “investment contract” under the “blue sky laws” that states had used to interpret the term in the original Howey case.
“That analysis makes clear that an arrangement is an “investment contract” only if the investor receives, in exchange for an investment, a contractual undertaking or right to an enterprise’s income, profits, or assets,” wrote the experts. “That core notion has carried through in the federal cases since Howey.”
What Is An Investment Contract?
According to the scholars, Minnesota’s blue sky law in 1919 was one of the first to include the term “investment contract.” It was meant to capture securities that were neither stocks nor bonds, but depended upon and gave a contract right training on future profits.
In several early Minnesota cases that followed, the state Supreme Court ruled that various financial schemes were investment contracts based on the explicit presence of “a contractual share of a seller’s later income, profits, or assets.” Many of these cases were later cited by Howey.
“An investment contract requires contractual undertakings to deliver future value reflecting the income, profits, or assets of a business,” the scholars concluded. “The Court should adhere to the settled meaning of the term.”
In early June, the SEC sued Coinbase for listing over a dozen crypto assets on its platform that the agency alleges are securities, despite Coinbase having failed to register as a securities exchange. Coinbase disputes that any of its listed assets qualify as such.
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