On March 8, 2024, the U.S. Court of Appeals for the Second Circuit reversed and remanded a District Court decision that dismissed all claims by plaintiff crypto investors against Binance, an international electronic exchange where the plaintiffs purchased their crypto assets.1
The original suit was brought in April 2020 for violations of the Securities Act, the Exchange Act, and state Blue Sky laws, alleging that Binance did not register itself as an exchange or a broker-dealer and did not file a registration statement for the securities it offered and sold.
In a March 31, 2022 decision, the trial court granted Binance’s motion to dismiss.2 Addressing extraterritoriality, the trial court found the federal securities laws apply to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities,”3 and that Binance did not meet these criteria. The court found plaintiffs’ allegations that Binance is hosted by U.S-based servers — as well as allegations regarding having English on the Binance website, several employees located in California, and job postings in the U.S.— insufficient to constitute a “domestic exchange.” Finally, the court found the relevant transactions were not “domestic” just because plaintiffs bought tokens while located in the U.S.4
Last week, the Second Circuit reversed, finding plaintiffs plausibly alleged that the transactions at issue were “domestic transactions in other securities.” “[T]o sufficiently allege the existence of a ‘domestic transaction in other securities,’ plaintiffs must allege facts indicating that irrevocable liability was incurred or that title was transferred within the United States.”5 Irrevocable liability attaches “when the parties to the transaction ‘are committed to one another’ or there was ‘a meeting of the minds.’”6 Based on this standard, the Second Circuit recognized two transactional steps that would give rise to an inference of irrevocable liability occurring in the U.S.: (1) when the transactions at issue were matched and became irrevocable on U.S. servers, and (2) when plaintiffs transacted on Binance from the U.S. and their buy orders became irrevocable pursuant to the exchange’s Terms of Use.
The Second Circuit highlighted the fact that its decision might have been different if the plaintiffs were seeking to apply U.S. securities law to transactions that, while initially processed on U.S. servers, occurred on a foreign-registered exchange as this may implicate comity concerns. However, since Binance is not registered in any country, purports to have no physical or official location whatsoever, and “notoriously denies the applicability of any other country's securities regulation regime,” the application of U.S. securities law here does not risk “incompatibility with the applicable laws of other countries.”
LEGAL TOKENS
Nature abhors a vacuum; apparently, U.S. securities laws and the Second Circuit do too.
For companies who are specifically trying to avoid application of U.S. requirements, it may be wiser to register in a (more favorable) foreign jurisdiction, rather than attempt to be stateless and, thus, susceptible to the extraterritorial reach of U.S. securities laws. Or at the very least, process all transactions on servers outside the U.S. and take whatever possible steps exist to establish that a transaction occurs outside the U.S.
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1 Williams v. Binance, No. 22-972, 2024 U.S. App. LEXIS 5616 (2d Cir. Mar. 8, 2024).
2 Anderson v. Binance, No. 1:20-cv-2803 (ALC), 2022 U.S. Dist. LEXIS 60703 (S.D.N.Y. Mar. 31, 2022).
3 Id. at *10 (quoting Morrison v. Nat'l Austl. Bank Ltd., 561 U.S. 247, 267, 130 S. Ct. 2869, 177 L. Ed. 2d 535 (2010)).
4 The Court found that the state Blue Sky statutes failed for the same reason.
5 Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 62 (2d Cir. 2012).
6 Absolute Activist, 677 F.3d at 67-68.
