Law Professors Blast SEC’s Concept of Investment Contract in Amicus Brief

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Six professors of law have issued an amicus brief in favor of Coinbase, blasting the U.S. Securities and Exchange Commission’s (SEC) stance on the definition of investment contracts. Through a historical examination of the development of securities laws, the brief concludes that an investment contract “requires contractual undertakings to deliver future value.”

Law Professors Explain Investment Contracts in Amicus Brief

Six professors from different U.S. universities have filed an amicus brief backing Coinbase’s position in its battle against the U.S. Securities and Exchange Commission (SEC).

Stephen M. Bainbridge from UCLA, Tamar Frankel from the Boston University School of Law, Sean J. Griffith of the Fordham Law School, Lawrence Hamermesh of the Widener University Delaware Law School, M. Todd Henderson from the University of Chicago Law School, and Jonathan R. Macey from Yale Law School argue that for the tokens listed on Coinbase to be considered investment contracts, their issuers need to have some contractual undertaking for investors.

In their brief, the law professors undertake a historical look at the origins of securities laws, explaining that the current security law framework was inspired by “blue sky laws” (laws seeking to establish safeguards for investors against securities fraud), with these routinely relying on contractual arrangements between issuers and investors to determine what constituted an investment contract.

Case Law Examined

According to several cases examined by the legal scholars, in every case where investment contracts were recognized by the Supreme Court and the second circuit, there was some contractual binding between issuers and investors, even in post-Howey test trials.

This view is also shared by Coinbase, which introduced a filing on June 28 declaring that “an economic arrangement can qualify as an investment contract only if it involves
an ongoing business enterprise whose management owes enforceable obligations to investors.”

The brief states the court should “adhere to the settled meaning of the term—consistently applied by the state courts interpreting state blue-sky laws, as well as by the federal appellate courts before and since Howey,” concluding that:

Under that settled meaning, an investment contract requires contractual undertakings to
deliver future value reflecting the income, profits, or assets of a business.

However, this view runs counter to SEC filings, which stated that Coinbase “attempts to construct its own test for what constitutes an investment contract.” For the regulator, even in the absence of a contractual obligation, an arrangement might be considered an investment contract, detailing that “Howey did not require a common law contract, and no court has held otherwise.”

What do you think about the amicus brief introduced by six law professors on investment contracts? Tell us in the comments section below.