Source: Aiying
In fact, Aiying has analyzed Binance’s case many times, but this time the court rejected several SEC lawsuits. I think it is worth analyzing it. To get straight to the point, let’s go through the general contents of the legal document:
Case Background
The SEC accused Binance and related parties of violating multiple provisions of the Securities Act and the Securities Exchange Act, including issuing and selling crypto assets without registration, operating an unregistered cryptocurrency trading platform, and making statements to investors. Misrepresentation and Fraud.
Main content:
Binance background: Binance is a company registered in the Cayman Islands and has operated an international crypto-asset trading platform since 2017. Changpeng Zhao is its founder and CEO. BAM Trading is the entity that operates the Binance.US platform in the United States and was founded in 2019.
SEC charges: Unregistered offering and sale of crypto-assets such as BNB (Binance Coin), BUSD (Binance Stablecoin), Simple Earn and the BNB Vault program.
Not registered to operate the Binance.com and Binance.US trading platforms.
As the controller, Changpeng Zhao is responsible for the operations and irregularities of these platforms.
BAM management and the trading platform made false and misleading statements to investors and engaged in fraudulent conduct.
The court’s initial decision:
The court decided that most of the case could proceed, but some of the charges were dismissed, specifically Count 2 (related to BUSD) and portions of Counts 1 and 3.
Securities Law and Securities Exchange Law
The SEC accused Binance and related parties of violating multiple provisions of the Securities Act and the Securities Exchange Act, including the following major legal provisions:
Securities Act of 1933
Sections 5(a) and 5(c): These sections provide that securities may not be offered or sold by mail or other means of interstate commerce, including over the Internet, without registration. The SEC alleged that Binance violated these terms by issuing and selling crypto-assets such as $BNB (Binance Coin), BUSD (Binance Stablecoin), Simple Earn, and BNB Vault without registration.
Securities Exchange Act of 1934
Section 5: Requires securities exchanges operating within the United States to register with the SEC. The SEC alleged that Binance and BAM Trading violated this provision by operating the Binance.com and Binance.US platforms without registration.
Section 15(a): Requires platforms operating as brokers or dealers to be registered. The SEC alleges that Binance.com and the Binance.US platform violated this provision by failing to register as a broker or dealer.
Section 17A(b): Requires clearing organizations (i.e. institutions that process and record securities transactions) to register. The SEC alleges that Binance.com and the Binance.US platform violated this provision by failing to register as clearing houses.
Securities Act of 1933 Section 17(a)(2) and (a)(3):
Section 17(a)(2) and (a)(3) prohibits making false statements or engaging in fraudulent conduct in connection with the offer or sale of securities. The SEC alleged that BAM Management and BAM Trading violated these terms by making false and misleading statements to investors.
Use a table to show you the status:
Source: Aiying
The court refutes some legal interpretations of the accusations
Reasons BUSD’s complaint (Count 2) was dismissed: The Court held that the SEC failed to adequately demonstrate that BUSD met the criteria for an “investment contract” (investment contract). The court noted that there were significant differences between the SEC’s complaint describing the manner in which BUSD was issued and sold, and the manner in which proceeds were distributed, and the parties’ successful assessment of Binance’s complaint. The SEC did not adequately demonstrate how BUSD met each criterion in the Howey test, and therefore the charge failed.
Reasons for dismissal of the Simple Earn Project complaint (part of the third count): The Court held that the SEC’s description of the Simple Earn Project did not meet the standards of an investment covenant. The court pointed out that although the SEC mentioned keywords such as "profit opportunities," "fund pooling" and "management expertise," these descriptions were not sufficient to prove that the Simple Earn project constituted an investment contract. Accordingly, that part of the charge was dismissed.
Allegation of Binance Secondary Market Sales (part of Count 1): The court dismissed the allegation involving Binance’s secondary market sales, arguing that the SEC failed to adequately account for the secondary market sales by non-Binance sellers. How does $BNB meet the definition of a "security". The court held that the SEC’s accusations mainly focused on Binance’s own sales practices. As for the sales practices of third parties in the secondary market, the SEC did not provide sufficient legal and factual basis to prove that these practices should also be subject to the Securities Act.
Case inspiration
How can Web3 organizations in the United States or serving American users avoid possible provocations and prosecutions from the SEC? Aiying Aiying summarized the following points for your reference:
1. Clearly define the purpose and function of the token
Prioritize practicality: Make sure the functionality of your token in the project is clear, such as being used to pay transaction fees, access platform services, participate in community governance, etc. The main purpose of the token should be closely related to the actual operation of the platform, rather than primarily as an investment tool.
Reduce speculation: Avoid over-emphasis on the appreciation potential or return on investment of the token in marketing, and focus more on its actual use in the ecosystem. Clearly inform users of the usage scenarios and actual functions of the tokens to prevent the SEC from identifying them as "securities."
2. Transparent issuance and management process
Avoid ICO Pitfalls: If conducting a token sale, especially an ICO, make sure the sale process complies with legal requirements. Consider a private sale (i.e. selling only to accredited investors), or a registered sale to ensure compliance.
Transparent management: Clearly disclose how project funds are used to ensure that the management and use of funds are transparent and consistent with the original commitment. Provide regular financial reports and project progress reports to avoid attracting SEC attention due to opaque use of funds.
3. Comply with current laws and regulations
Registration or exemption from registration: When operating in the United States, make sure your project complies with SEC requirements for securities offerings. If a token is likely to be considered a security, consider legally issuing the token through registration or applying for an exemption.
AML and KYC requirements: Comply with anti-money laundering (AML) and know-your-customer (KYC) legal requirements. Ensure that platform users undergo strict identity verification during registration and transaction processes to prevent illegal activities.
4. Work with legal and compliance experts
Hire legal counsel: Always work with experienced cryptocurrency legal counsel during the development and token issuance process of your project. Legal counsel can help you assess the legal risks of your project and ensure that legal requirements are followed at all stages of the project.
Compliance team: Establish or hire a dedicated compliance team to monitor regulatory changes globally and adjust projects in a timely manner to comply with new regulatory requirements.
5. Clear marketing and communications strategy
Careful marketing: In publicity and promotion, avoid using language that might cause the token to be viewed as an investment contract. For example, avoid promising high returns or emphasizing the speculative value of tokens, and focus more on the project’s technological innovation, community value, and the actual use of tokens.
Educate users: Help users understand the functions and usage scenarios of tokens by publishing educational materials, and avoid legal issues caused by misunderstandings or wrong expectations.
6. Prudent governance and operating model
Decentralized governance: If the project claims to be decentralized, ensure that the governance structure is truly decentralized and users can participate in the decision-making process, reducing centralized control by the issuer or development team. This helps prevent the SEC from defining projects as “securities” controlled by a few individuals.
Community-driven: Establish strong community support and give users more power through voting and other mechanisms, reducing the project's dependence on core team members and further reflecting decentralization.
7. Legal secondary market operations
Control the risk of market manipulation: In secondary market operations, avoid manipulating market prices and ensure that all market transactions are fair and transparent. Regularly monitor market behavior to prevent manipulation that may attract the attention of the SEC.
Compliance listing: Before listing a token, ensure that the exchange complies with local legal requirements. Especially when listing in the United States, choose an exchange that already complies with SEC regulatory requirements.
8. Addressing future legal challenges
Prepare contingency plans: Prepare plans in advance to deal with legal challenges, including the selection of legal defense teams, communication strategies with regulatory agencies, etc. Be able to respond quickly if there is a regulatory investigation.
Cooperate with regulators: If the regulatory environment changes, proactively working with regulators and demonstrating your willingness to adjust the project to comply with new regulations can reduce conflict and potentially lead to settlement.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: "Deep Wave TechFlow"
Original author: Aiying
