Terraform Labs Says Bankruptcy May Shield it From SEC Penalty

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Key Takeaways

  • Chapter 11 bankruptcy protections may enable the firm to pursue an appeal without the obligation of posting the bond.
  • Terraform Labs argues that the SEC lacks authority over it because its crypto tokens do not qualify as “securities.” 

Terraform Labs, currently in the midst of Chapter 11 bankruptcy proceedings, has revealed its strategic move to employ bankruptcy protection as a means to mount a “do-or-die” appeal against the U.S. Securities and Exchange Commission (SEC). 

In a filing to a Delaware Bankruptcy Court on January 30, Terraform Labs CEO Chris Amani highlighted the critical role Chapter 11 bankruptcy plays in facilitating a successful appeal against the SEC. The company, best known for its stablecoin TerraClassicUSD (USTC), initiated bankruptcy proceedings on January 21. 

Normally, an appeal against the SEC would necessitate Terraform Labs to provide a “supersedeas bond” of 110% of the total judgment, a substantial financial commitment. However, Chapter 11 bankruptcy protections may enable the firm to pursue an appeal without the obligation of posting the bond.

The backdrop for this decision is a federal judge’s ruling in December, which found Terraform Labs and its founder, Do Kwon, in violation of U.S. law for failing to register two digital currencies. 

The SEC’s fraud claims against Terraform Labs are slated for trial in March. Still, the company expressed concerns about its financial capability to settle a potentially significant judgment or fund an appeal. Chris Amani noted in the court filing, “The exact size of a money judgment remains unknown, but it could very well outstrip the debtor’s assets.” Terraform Labs currently has access to around $28 million in Bitcoin, $7 million in various other cryptocurrencies, and approximately $87 million in its proprietary token, Luna.

The company’s intended argument on appeal revolves around asserting that the SEC lacks authority over Terraform Labs because its cryptocurrency tokens do not qualify as “securities.” Typically, such an appeal would require posting a bond. However, Terraform Labs contends that Chapter 11 bankruptcy protection offers a unique opportunity to appeal without the financial burden of a substantial bond.

The company, listed with assets and liabilities in the range of $100 million-$500 million, is determined to navigate the bankruptcy process while advancing its contributions to the crypto space. The SEC’s case against Terraform Labs has been delayed until April due to facilitate extradition proceedings for Do Kwon from Montenegro.

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Saniya Raahath
Saniya Raahath

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