State Attorneys General File Lawsuit Alleging SEC Overreach in Digital Asset Regulation

In a complaint recently filed in the U.S. District Court for the Eastern District of Kentucky, 18 state attorneys and the DeFi Education Fund allege the Securities and Exchange Commission (SEC) exceeded its regulatory authority over digital assets. According to a client alert from Morgan Lewis, the petitioners put forth three distinct arguments:

1. Most digital assets are not investment contracts which would be subject to the federal securities laws;
2. The Commission’s “regulation by enforcement” exceeds the agency’s regulatory authority under the Administrative Procedure Act and the Major Questions Doctrine; and
3. The Commission’s actions infringe upon state sovereign rights and negatively impact each state’s economy.
   

In a prior case from July 2023, the U.S. District Court for the Southern District of New York held that Ripple could not sell XRP to institutional clients unless offers and sales are made under a valid exemption or are registered pursuant to the Securities Act of 1933. Interestingly, the court held that digital asset transactions on exchanges are not securities transactions because they are not investment contracts.

 Click here to read a client alert from Morgan Lewis covering the State AG lawsuit.