Extraterritorial Reach of Securities Laws: Crypto Edition

It's crytpo week on the blog!  On Monday, we wrote about recent smash-hit scholarship, Debt Tokens. In our latest episode on crypto, like in every episode, courts struggle to apply laws that the crypto world seeks to evade to financial instruments that judges and blog editors struggle to comprehend.   

A putative class accused Binance and its principals of selling a crypto-asset known as a token without registering the tokens as securities in violation of the §12(a) of the 1933 Securities Act, §29(b) of the 1934 Exchange Act, and state Blue Sky laws.  The class sought rescission of their contracts with Binance.  In 2022, the district court dismissed the action in JD Anderson v. Binance, on the ground that the laws in question did not have extraterritorial reach.  The district court also dismissed the federal claims as untimely.

In March, 2024, nearly a year after oral argument, the Second Circuit reversed in Williams v. Binance.  The case is a puzzler, but I'm not sure that justifies  the long gap between dismissal and reinstatement of claims.  Here's the problem.  Binance purports to be the world's largest online exchange for crypto-assets.  It also claims that it doesn't exist.  That is, although its titular headquarters are in Malta, it denies that it is a "Malta-based cryptocurrency company."  Rather, it exists in a decentralized manner so as to service its users in 180 countries.  

Well, one of those countries is the U.S.  Binance has servers, employees, and customers here.  Plaintiffs are among those U.S. based customers, and they placed orders for the tokens at issue in the case by accessing electronic platforms from the U.S. or U.S. territories.  At least at this stage in the litigation, there is no dispute that the tokens that plaintiffs purchased are securities.  However, while the tokens enable their creators to raise capital, they do not (ah, cyrpto) entitle the token holders to any interest, either as creditor or as owner, in the underlying venture.  The investment is in the tokens themselves.  So, the idea is a no-doubt sophisticated version of betting on a roll of the dice. The initial offerings raised $20 billion.  Some genius. . . .

The plaintiffs bought these tokens without the benefit of registration statements that the SEC would require prior to the issuance of new securities.  Instead, plaintiffs got a "white paper," that was part advertisement and part "technical blueprint."  Plaintiffs then sought rescission in a 327-page complaint stating 154 causes of action.

The big issue in the case is the extraterritorial reach of U.S. securities laws.  The controlling case is Morrison v. Australia Nat'l Bank, Ltd. To cut to the chase, the transactions at issue were domestic under Morrison. They became irrevocable in the United States, both because, under Binance's terms of service, plaintiffs' orders were irrevocable when sent within the United States and because plaintiffs plausibly alleged that those orders "matched" on servers located in the United States. 

Matching is tricky.  It involves something like a meeting of minds and the "clearing" of a transaction.  It seems that Binance wants to argue that, because it operates everywhere and nowhere, matching does not occur in the United States.  The Second Circuit rejected the argument that matching occurs nowhere.  Rather, plaintiffs plausibly alleged that matching occurred on Binance's infrastructure located within the United States. 

The alternative ground for the applicability of U.S. securities laws seemed a slam dunk.  While there is case law suggesting that merely sending orders within the United States does not render the transaction irrevocable, here Binance's own terms of service so provide.

As to the timeliness of the complaint, the Second Circuit allowed plaintiffs' claims to proceed only with respect to tokens purchased within one year of the filing of the complaint.  That  reasoning applied to plaintiffs' claims under both §12(a)(1) and § 29(b).  The analysis is a bit different with respect to each claim, but this is the ContractsProf Blog, so you can either read the opinion yourself or see what our friends over at the EquitableTollingofSecuritiesLawClaimsProf Blog have to say on the issue.