DeFi Education Fund and Beba File Lawsuit Against SEC Over Token Airdrops and Rulemaking

The DeFi Education Fund and fashion brand Beba have filed a lawsuit against the SEC, challenging the agency's classification of their $BEBA token airdrop as a security. The plaintiffs argue that the airdrop does not constitute an investment contract under the Howey test and that the SEC violated the Administrative Procedure Act by failing to provide public notice and comment on its determination that digital assets are generally securities. The lawsuit highlights the ongoing tension between the SEC and the crypto industry over the regulation of digital assets.

SEC Faces Lawsuit Over $BEBA Token Airdrop and Rulemaking Process

In a bold move to challenge the Securities and Exchange Commission's (SEC) authority over digital assets, the DeFi Education Fund and clothing company Beba have filed a lawsuit in a Texas district court. The plaintiffs allege that the SEC's labeling of $BEBA tokens as securities is arbitrary and violates the Administrative Procedure Act (APA).

Token Airdrops and the Howey Test

The SEC has previously used the Howey test, a legal precedent established in 1946, to determine whether an asset qualifies as an investment contract and, thus, a security. Under the Howey test, an investment contract involves an investment of money in a joint enterprise with a reasonable expectation of profits derived from the efforts of others.

The DeFi Education Fund and Beba contend that $BEBA token airdrops do not meet the criteria of the Howey test. They argue that the tokens are not offered as investments, there is no joint enterprise between the company and token recipients, and there is no reasonable expectation of profits based on the efforts of others.

Violation of the APA

The lawsuit also alleges that the SEC violated the APA in its determination that most digital assets are securities. The APA requires federal agencies to follow a transparent rulemaking process that includes soliciting public input. The plaintiffs argue that the SEC failed to provide proper notice and opportunity for comment on its policy, depriving the digital assets industry and the public of their right to participate in the decision-making process.

SEC's Enforcement Campaign

The SEC's recent enforcement actions against companies using digital assets have drawn criticism from the crypto industry, which accuses the agency of overreach and a lack of clear regulatory guidance. Monday's lawsuit marks the second time in recent weeks that the industry has sued the SEC, following a similar suit filed by digital asset company LEJILEX in February.

Industry Implications

The outcome of this lawsuit could have significant implications for the regulation of digital assets. If the court rules in favor of the plaintiffs, it would establish a precedent that token airdrops and other decentralized technologies are not automatically classified as securities. This would provide greater regulatory clarity for businesses and investors in the crypto space.

SEC Response

The SEC has not yet publicly responded to the lawsuit. It has 60 days to file a response, after which the court will schedule a hearing to consider the arguments presented by both parties. The outcome of the lawsuit is likely to be closely watched by the crypto industry and regulators alike.

Disclosure:

The Block, which reported on this lawsuit, is an independent media outlet that provides news, research, and data on the crypto industry. While Foresight Ventures, an investor in The Block, also invests in companies in the crypto space, The Block operates independently and strives to provide objective and impactful information about the industry.