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It’s Our Time: DEF Goes on Offense Against the SEC

On March 25, 2024, DEF and Beba, a Waco, Texas-based apparel company, sued the SEC. We seek a court order that the SEC unlawfully adopted its “nearly all tokens are securities” policy—never publicly defined yet wantonly enforced—and that $BEBA token free airdrops are not securities transactions. 

In this post, we explore why we were forced to take this action, summarize our claims, and discuss why we think this case is important.

Why are DEF and Beba bringing this suit?

This case is about reigning in unchecked agency power and overreach. The crypto community has been under attack for years by the SEC, which has refused to publicly clarify basic rules for digital asset transactions and sidestepped Congress to engage in a destructive enforcement crusade based on its “poorly conceived crypto policy.” The agency’s freestyle policymaking since Chair Gensler’s appointment means that anyone seeking to do anything with a digital asset must fear being the SEC’s next target. DEF brought this suit to protect the industry and seek a clear court order that the SEC’s regulation of digital assets by enforcement is unlawful. 

Beba is one of those businesses living under the shadow of the SEC’s sword of Damocles, having decided to leverage digital assets for marketing purposes. Beba gave away its $BEBA tokens via airdrop to reach more potential customers and expand brand awareness. But the SEC’s unlawfully adopted policy means that Beba fears being its next enforcement target. Any enforcement action brought against Beba, a small business, would be an existential threat to the company. Even dealing with an SEC investigation would put most small businesses under. 

Beba, like every American and American business, has the right to know what the law is so that it can pursue its business lawfully and without fear of an expansionist federal regulator’s arbitrary actions putting it out of business. Unfortunately, Beba must proactively seek a court order to do so—an extraordinary burden that reflects the high costs of the SEC’s unprecedented behavior. We’re proud to be working with Beba. 

What is in the complaint? 

Our suit seeks relief on two fronts: 

  1. A declaration that $BEBA tokens are not themselves investment contracts and a free airdrop of a $BEBA token is not a securities transaction; and

  2. An order that the SEC violated the Administrative Procedure Act (“APA”) when it adopted behind closed doors its “nearly all digital assets are investment contracts and nearly all digital asset transactions are securities transactions” policy.

Beba is an apparel company that created a new token with the intent of using it for marketing purposes. The $BEBA token can be redeemed for an exclusive product from Beba’s online store that is only available to token holders at a discount. Importantly, Beba distributed and plans to continue to distribute the $BEBA token through free airdrops, a common means of distributing a new digital asset to preexisting digital-asset users. But the SEC’s limitless view of its own authority means that Beba must worry about being targeted by the SEC. 

The SEC will take the position—in line with its unwritten adopted policy—that BEBA tokens are investment contracts and that the airdrops are securities transactions subject to registration requirements under the securities law. But, as we argue, the SEC’s policy gets the law wrong, as neither the airdrops nor the tokens are “investment contracts,” or any other type of security. 

Because $BEBA tokens were given away for free, there was no “investment of money” by recipients of the airdrop, a necessary prong of the Supreme Court’s test for determining whether an investment contract exists. As we write, “Beba has never sold BEBA tokens to the public and has no plan to do so. Beba has never accepted currency or assets in exchange for BEBA tokens in any forum. No group of recipients paid Beba for its BEBA tokens; they received the BEBA token for free. And its requested social media follows in its planned second airdrop do not involve the payment of any money. Beba’s completed first airdrop and planned second airdrop therefore do not involve an “investment of money” and are not subject to the SEC’s authority.” 

Beba is proactively seeking judicial confirmation that its token and distributions are not securities so that it does not have to operate under the pall of the SEC’s enforcement of its new and unlawfully adopted crypto policy. 

We seek an end to the SEC’s anti-crypto crusade by challenging the SEC’s unlawful adoption of its new crypto policy. The APA “tells agencies that when they make new rules, they must do so openly, clearly, and with the benefit of public input.” But the SEC finalized a policy “a digital asset itself is presumptively an ‘investment contract,’ a type of security under federal law, and transactions involving a digital asset are almost always securities transactions subject to the SEC’s authority” with no public process at all.  

Instead of issuing rulemaking on its new policy, the SEC adopted this policy via a “behind-closed-doors” process that deprived the industry and the public at large of notice, an opportunity to provide input, and a forum for judicial review. And the SEC has never publicly defined the limits of its new policy, which one commissioner describes as lacking any “limiting principle” whatsoever.

Yet “Congress gives regulatory and enforcement power to executive agencies on the condition that they exercise that power under the strict and careful protocols of the APA.”  Any objective review of the SEC’s approach to crypto ends with the conclusion that the SEC has run roughshod over the basic requirements of the APA and fundamental principles of due process. We ask the court to finally put an end to the SEC’s unprecedented actions.  

What’s next? 

Assuming all goes according to normal procedure, the SEC will have 60 days to respond to the complaint. They are likely to make a motion to dismiss the complaint, which we will be ready for. 

We will keep the community updated throughout the entire process. 

We would welcome your support and would love for you to support Beba, our courageous partner in this. Please consider donating to DEF or purchasing some sick apparel from Beba (links below). 

Join the DeFi People in our fight against agency overreach!

And who is Beba?

Beba LLC is a small apparel company based in Waco, Texas. Beba was started by two brothers who grew up in East Africa, where they built relationships with local craftspeople who create beautiful handmade goods. Beba now sells handmade luggage and accessories made by those craftspeople through its online store. It compensates the craftspeople well, celebrates their work, and supports their families. Most of all, Beba’s founders believe in the power of digital assets to change the world and benefit underserved and underbanked communities. They also believe digital assets are some of the best marketing tools around and will allow them to reach a wider audience of potential customers for their products.

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