Judge Denies Motion to Dismiss Terraform Case, Cites Disagreement with Ripple Decision

The United States Securities and Exchange Commission (SEC) lawsuit against Terraform Labs has cleared a significant hurdle as a U.S. judge overseeing the case denied the firm’s motion to dismiss on July 31.

Judge Jed Rakoff of the Southern District Court of New York rejected the defendants’ motion, ruling that all well-pleaded allegations must be taken as true for the purposes of this motion, with all reasonable inferences drawn in favor of the SEC. The SEC filed the lawsuit against Terraform Labs and its founder, Do Kwon, on February 16, accusing them of orchestrating a multi-billion dollar crypto asset securities fraud.

In their previous dismissal motion, Terraform Labs’ legal representatives argued that the SEC lacked jurisdiction over the company and its founder, and also contested the agency’s stance on tokens such as Mirror Protocol (MIR), Terra Classic (LUNC), and TerraUSD Classic (USTC) as securities. They further argued that Congress was actively debating how to regulate crypto and that the SEC should wait for Congress to act.

However, Judge Rakoff disagreed with these arguments and rejected the claim that the SEC lacked the authority to regulate crypto tokens without Congressional authorization. He also addressed the “Major Questions Doctrine” cited by Terraform’s objection. The judge emphasized that no formal contract is necessary to meet the Howey test, and tokens themselves may be considered as evidence in arguments before the court.

Furthermore, the court refused to draw a distinction between tokens MIR and LUNA based on their manner of sale. This stance contrasts with a recent case involving SEC v. Ripple Labs Inc., where another judge in the same district made such a distinction. In the Ripple case, the judge considered XRP a commodity when sold on the secondary market, which was seen as a partial win for Ripple. However, the rejection of this approach in the Terraform case could potentially favor the SEC if other judges follow Judge Rakoff’s example.

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