Paradigm Files Amicus Brief Supporting CFAT and Lejilex’s Lawsuit Against the SEC

Lejilex’s lawsuit against the SEC

Lejilex is a Texas company developing a new trading platform called Legit.Exchange that would like to allow peer-to-peer sales of tokens that the SEC has claimed are investment contracts under the federal securities laws. As a result—according to the SEC’s misguided view—Lejilex is planning to create an unregistered securities exchange. Lejilex, along with the Crypto Freedom Alliance of Texas (CFAT), sued the SEC asking it to declare that secondary-market sales of crypto assets are not sales of securities, and that the federal securities laws do not apply to Legit.Exchange. It argues that the SEC’s current war on crypto is outside the agency’s legal authority – which makes sense given that Congress created the securities laws in the 1930s to regulate investment contracts, not to govern the present-day crypto marketplace.

Our Amicus Brief

We have seen firsthand how much the SEC’s reflexive hostility can hurt projects and hamper markets, all based on the misguided argument that crypto assets should be treated as investment contracts. Our amicus brief today highlights for the court four key distinctions between crypto assets and securities:

1. Independence: Unlike securities, which are inextricably linked to their issuers, crypto assets can exist and retain value independently of their creators. Their value stems from their utility, or from market demand—not from the business performance of an issuing entity.
2. Obligations: Crypto creators do not have the same fiduciary obligations to asset holders as corporations do to their shareholders. Indeed, sales of crypto do not transfer these obligations at all—they transfer ownership.
3. Decentralization: Ownership of crypto assets does not confer control over the creator or the project, unlike shareholder rights in a corporation. Instead, crypto projects tend to operate on decentralized networks where decisions are made by community consensus rather than by a group of C-Suite managers or a board of directors.
4. Trading: Crypto markets operate through decentralized exchanges that use blockchain technology to facilitate direct peer-to-peer transactions. This eliminates the need for brokers, clearinghouses, and other middlemen that pervade the securities markets.

These are just a few of the most prominent differences between crypto assets and securities. But they’re enough to show that the SEC’s contrary view rests on a false equivalence.

Why it matters

Forcing crypto into the regulatory framework for securities is not just unlawful, it also will fail to accrue any benefit to the public that the SEC is supposed to protect. Even if crypto projects could follow the SEC’s current disclosure rules (which are incompatible with decentralized protocols and projects), compliance would not help purchasers of crypto assets. The disclosure rules demand information that is irrelevant to crypto and would fail to result in the disclosure of information that would be useful to purchasers of crypto assets. And worse, the current disclosure regime would result in misleading information being provided to crypto asset purchases. This mismatch exists because the premise of the SEC’s war is fundamentally flawed – crypto assets are not investment contracts. This single misunderstanding makes this entire campaign against crypto collapse in on itself, like a political neutron star. The SEC should cease this flawed crusade and return to its core mission of regulating through traditional formal rulemakings and asking Congress for legislation on novel topics, as required by law.