Paradigm Provides Amicus Support for DEF and Beba’s Lawsuit Against the SEC

Imagine you are an entrepreneur preparing to do a token airdrop. Amid the myriad operational and logistical questions you must consider, you are struggling on something more abstract: can a free token airdrop be considered an investment contract under Howey?

On the one hand, the law seems clear that since Howey requires an investment of money, your free token airdrop doesn’t meet the requirements of an investment contract. But you might be filled with FUD given the SEC’s enforcement actions against other projects that have given something away for free.

Since you know the SEC won’t provide you with clarity absent judicial intervention, you spend the time and expense on the last option available: a lawsuit demanding clarity. But instead of engaging with your arguments, the SEC argues that the lawsuit cannot proceed because there is no credible threat of enforcement against you. For a moment, you think to yourself that you may have cracked the code on obtaining regulatory clarity. If there’s no credible threat against you, then you can go ahead with the airdrop you have been planning!

Wrong. You realize that somehow the SEC is arguing there is no credible threat against you so your case should be dismissed – but it also provides no assurance that your free airdrop is not an investment contract or that you are safe from enforcement. You are trapped in a bureaucratic nightmare that would seem over-the-top even for Kafka - efforts to get clarity are met with only a greater refusal by the SEC to give it.

This absurdist regulatory approach to crypto is why Paradigm, along with other investors, filed an amicus brief today supporting Beba and the DeFi Education Fund (“DEF”) in their lawsuit against the SEC. Beba is a Waco, Texas-based company that sells duffel bags, backpacks, and wallets and has previously utilized a free token airdrop to market its products. Its fear of enforcement by the SEC has prevented it from launching its next free airdrop and it seeks a declaratory judgment that it may proceed without being prosecuted. Along with DEF, Beba also argues that the SEC’s de facto rule that the vast majority of digital assets are securities violates the Administrative Procedure Act.

We know from first hand experience that Beba’s experience is not unique – it is the common experience of the average crypto founder. Even where the law is clear that enforcement is not warranted, many live in fear of enforcement and even choose not to serve US customers or offer them the benefits that they offer offshore customers. Our amicus brief argues that the SEC cannot continue having it both ways, meeting good faith questions with deflection but hitting efforts to operate in crypto with repressive enforcement actions. We urge the court to let Beba and DEF’s challenge be heard on the merits.