The litigation between the SEC v. Ishan Wahi, Nikhil Wahi, and Sameer Ramani (abbr. Wahi) is an unprecedented, stealth attempt to expand the agency’s jurisdictional reach, and threatens the health and viability of the U.S. marketplace for digital assets. 

The case represents a new front in the SEC’s longstanding “regulation by enforcement” campaign, one which has already caused a great deal of harm to the digital asset industry, as well as investors in digital assets.

The Chamber, alongside the legal team at Winston & Strawn LLP, has filed an amicus brief seeking to dismiss the case and put an end to the SEC’s attempt at “back door” rulemaking. Should the Court support the SEC’s claim that the digital assets at issue in this case  are in fact “securities,” that decision would have far-reaching implications for the digital assets industry and we felt that it was imperative to share our concerns with the Court.

Several proposed pieces of legislation currently pending before Congress would help clarify the chaotic regulatory environment for digital assets. Presently, the lack of clear rules and regulations have created significant uncertainty, driving innovators in this space offshore and reducing U.S. competitiveness and its ability to protect investors.

Unfortunately, rather than waiting for congressional action – or even using its rulemaking authority to promulgate rules  or issue adequate binding guidance for the digital asset industry – the SEC has forged ahead with lawsuits and enforcement activity.

In doing so, the SEC is relying on laws enacted in the 1930s, as well as on a 1940s Supreme Court decision, United States v. Howey, which related to investments in a Florida orange grove.  Howey set a four-prong test for determining whether a given asset was sold as an “investment contract” and thus constitutes a securities offering but does not shed any light on whether the underlying asset itself is a security.  Additionally, the Howey test was never meant to apply to the sorts of secondary market transactions at issue here, where there was no “contract” at all. 

The allocators who created the tokens at issue in Wahi, the digital asset exchanges that facilitate their purchase and sale, and the many other entities and individuals that own, trade, advise on, or use those tokens to do business do not consider them to be securities—and there is no federal law stating that they are. Given the opaque regulatory environment, other federal regulators—and even high-ranking officials within the SEC itself—have criticized the SEC’s approach, which is increasingly reflecting the view that all digital assets transactions are securities transactions, even if they bear none of the hallmarks of an “investment contract” under the Howey test.

The Chamber has requested that the Court dismiss the case–noting that the action exceeds the SEC’s statutory authority–and put an end to the SEC’s attempt at this kind of “back door” rulemaking. We also note that judicial restraint in this matter would not let the alleged wrongdoers off the hook; they have been indicted by the DOJ, pled guilty and are certainly subject to an action for civil fraud, as well. A ruling embracing the SEC’s position and endorsing its tactics, however, would have tremendously negative implications for the digital economy and its institutional and individual participants.

In addition to Winston & Strawn, the Chamber would also like to thank our members who contributed to the preparation of the brief, including, among others, Lee A. Schneider of Ava Labs, Rana Kortam of Binance, Steven Gatti and Jesse Overall of Clifford Chance, Lewis Cohen and Freeman Lewin of DLx Law, and Jeremy Williams of TradeStation Crypto, Inc.