US Government Sues Decentralized Content Platform LBRY Over $11M in Token Sales

The U.S. Securities and Exchange Commission (SEC) is pursuing yet another case of a blockchain company allegedly selling unregistered securities.

According to court documents filed Monday, peer-to-peer content distribution network LBRY is being accused of selling "millions of dollars worth of unregistered securities to investors" beginning in 2016.

The securities regulator is seeking a permanent injunction against LBRY from selling further tokens in addition to a disgorgement of "ill-gotten gains" plus prejudgement interest.

The SEC says the securities were sold in the form of LBRY Credits (LBC), which were communicated to investors as being used to fund LBRY's business and build its product, according to the document.

LBRY is an open-sourced protocol allowing participants to post content without fear of retribution. The SEC says LBC tokens were sold as investment contracts in exchange for U.S. dollars and other non-monetary contributions.

The network has solicited help from the cryptocurrency community, claiming the industry is at risk while simultaneously saying its credits are not securities.

"The SEC complaint against LBRY reflects an outdated view of the economy that stifles innovation, accessibility, and creativity," LBRY's CEO Jeremy Kauffman told CoinDesk via email. "Under the overreaching standard set by the SEC complaint, most blockchain tokens would be deemed securities, leaving uncertainty and confusion in the industry."

Kauffman added the SEC's complaint fails to acknowledge steps taken by his company to comply with the law and its efforts to conduct its business in a "forthcoming and transparent way."

Of particular note in the SEC document and brought to attention in a tweet by crypto lawyer Grant Gulovsen are allegations LBRY enlisted a vendor to use 40 million LBC from its institutional fund to act as a market maker (MM).

The MM operated as a middleman to buy and sell LBC on a "regular and continuous" basis at prevailing market prices. The SEC alleges this activity provided an air of credibility that the platform was capable of generating a profit.

LBRY and Altonomy announced a market-making partnership as recently as June 2020. Polychain Capital led a $7 million funding round in Altonomy in July 2019.

Stemming from the initial coin offering (ICO) craze in 2017, the SEC has been clamping down on cryptocurrency and blockchain businesses it claims are operating outside of U.S. securities law by selling unregistered products to vulnerable investors.

Among these, the most notable cases include Ripple, Block.one and Telegram.

UPDATE (March 30, 2021, 2:40 UTC): Includes comments from LBRY CEO Jeremy Kauffman