Paradigm Files Amicus Brief in SEC vs Wahi

March 10, 2023 | Rodrigo Seira

TLDR: Paradigm filed an amicus brief in SEC vs. Wahi that rejects the SEC’s expansive and unsupported application of securities laws to crypto secondary markets.

In Wahi, the SEC is attempting to claim jurisdiction over the defendants’ secondary trading of nine tokens by alleging that the “crypto assets were investment contracts.” This is wrong on the facts and the law.

To begin, the tokens themselves do not provide the holder with any legal right or interest in a third party, as is evident from a review of the annotated smart contract code we included in our amicus brief. Therefore, other than potentially being sold as part of “investment contract” transactions under Howey, the tokens themselves cannot be said to qualify as any type of security under the Securities Acts.

Further, to correctly analyze the Defendants’ transactions as “investment contracts” under Howey, the SEC would need to show how each transaction met all four prongs of the Howey test at the time they occurred – something that the SEC fails to do. Instead, the SEC alleges that the tokens were initially sold in fundraising schemes and then claims these fundraising schemes are “ongoing,” somehow resulting in the defendant’s secondary market transactions in the tokens being securities transactions.

The SEC’s fundamental misunderstanding is their belief that because the tokens were initially sold in transactions that may have been investment contracts, the tokens themselves became – or “embody” – the investment contracts. However, this is not how Howey has been applied over its 75-year history. Not once, not ever.

The catch-all concept in the definitions of “security” in the Securities Acts, “investment contract”, has been flexibly applied to bring fundraising transactions that elevate form over substance within the ambit of the federal securities laws. However, the concept of “investment contract” has never been extended to apply to parties not involved in those fundraising transactions, for good reason.

Rather than focusing its enforcement efforts on promoters that are raising capital using tokens, the SEC instead seeks to apply the Securities Acts to the defendants, who are third-party purchasers of the tokens. This unsupported expansion of the Securities Acts shifts the burden of compliance from the persons who may have sold non-security assets to raise funds for a business without SEC registration to the third-party owners of these assets – the very persons the Securities Acts are intended to protect.

Paradigm will keep fighting the Commission’s disregard for due process and existing precedent. If you have ideas for matters we should get involved in, please reach out to