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Round I of the anticipated class action lawsuits against domestic and foreign crypto exchanges under the U.S. securities laws resulted in a victory for the exchange.

Last week, the federal District Court in the Southern District of New York dismissed a class action lawsuit against Binance in Anderson, et al. v. Binance et al., No. 1:20-cv-2803 (ALC) (S.D.N.Y.). The plaintiffs — a putative class of purchasers of nine tokens listed on the exchange starting in 2017 — claimed that each of the tokens were unregistered securities, and that Binance promoted, offered, and sold the tokens through Initial Coin Offerings in violation of the federal Securities Act, Exchange Act, and state Blue Sky laws.

U.S. District Judge Andrew L. Carter, Jr. dismissed the 327 page, 154 count complaint in its entirety without oral argument, on three grounds:

Statute of Limitations – Securities Act Claims 

The plaintiffs’ principal claims were brought under Section 12(a)(1) of the Securities Act, which provides a private right of action arising from the offer or sale of a security in violation of the Act’s registration requirements. The statute of limitations for these claims is one year from the date of the violation. See 15 U.S.C. § 77m. All parties agreed that plaintiffs purchased seven of the nine tokens at issue in 2018 (more than a year before they filed suit), but the plaintiffs argued that various equitable doctrines applied to extend the period because they did not have sufficient information to understand that these tokens were securities until the SEC staff issued its Framework for “Investment Contract” Analysis of Digital Assets on April 3, 2019. Judge Carter rejected both arguments, concluding that the limitations period for Section 12(a)(1) claims runs, under the plain language of the statute, from the date of the alleged violation and is not subject to extension on atextual grounds. With respect to the other two tokens, the Court concluded that Binance’s last act of solicitation (a prerequisite to “statutory seller” status under Section 12(a)(1)) occurred when it republished investor reports in November 2018 and February 2019. Since this predated the filing of the complaint by more than one year, the claims were barred.

Statute of Limitations – Exchange Act Claims 

Judge Carter dismissed the plaintiffs’ claims under Section 29(b) of the Exchange Act, which generally provides that a contract made in violation of the Exchange Act is voidable at the option of the investor. Unlike claims under Section 12(a)(1) of the Securities Act, the one-year limitations period for Exchange Act Section 29(b) claims only begins to run from the date of discovery (and no later than three years from the violation). Judge Carter held that the essence of the plaintiffs’ Section 29(b) claim was that Binance operated as an unregistered exchange, but that plaintiffs failed to allege that they did not know this fact within one year of the filing of the complaint. The Court also rejected plaintiffs’ argument that they could not have known the critical facts of their claim until the Framework issued because “[t]he Framework did not reveal new facts, and therefore, it does not delay the accrual of the Seciton 29(b) claims." The Court dismissed the Section 29(b) claims as untimely.

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Extraterritoriality

In the most interesting (and generally applicable) section of his opinion, Judge Carter rejected the claims against Binance in the alternative on extraterritoriality grounds. Relying heavily on the Supreme Court’s 2010 decision in Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010), Judge Carter held that the federal securities laws only apply to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.”

With respect to the first requirement (domestic exchange), the Court concluded that Binance (the Maltese company, not Binance U.S.) was under no obligation to register as a domestic exchange because its facilities were not “within or subject to the jurisdiction of the United States” — a requirement of 15 U.S.C. § 78e. Judge Carter rejected the plaintiffs’ argument that Binance was subject to domestic regulation because it used U.S.-based infrastructure (specifically, Amazon Web Services servers and Ethereum blockchain computers), holding that “third-party servers and third parties’ choices of location are insufficient to deem Binance a national securities exchange.”

The Court also rejected the claim that the plaintiffs’ transactions themselves were domestic to the United States, on the ground that buying tokens while located in the U.S. on a website hosted on a U.S. server is insufficient under Second Circuit precedent.

The Court went on to dismiss the plaintiffs’ blue sky claims under the laws of five states on the same extraterritoriality grounds, concluding that “the relevant [state] laws do not apply extraterritorially.”

Lessons Learned

While the narrow statute of limitations issues addressed by the Anderson decision are unlikely to have much impact in future class action claims against exchanges, Judge Carter’s extraterritoriality decision will. For the time being, it reflects a clear victory for foreign exchanges that do not purposefully direct their solicitation efforts to United States customers and do not locate significant infrastructure here.

These arguments are unavailable, however, to domestic crypto exchanges (like Binance U.S. and Coinbase). Round II of the exchange wars will involve a multitude of different issues that the Court in Anderson was not called on to address. The recent suit brought by Selendy Gay Elsberg PLLC against Coinbase in front of Judge Elgelmayer in the Southern District of New York is likely to bring them to the fore. Stay tuned.