SEC Is Now Investigating Terraform Labs Following UST Collapse

By Kevin • June 11, 2022 3:19 pm • Comments

Recent reports indicate that the SEC is now investigating Terraform Labs which is the company that was behind the token LUNA and the UST stable coin that imploded.

The depegging of the UST stable coin brought a lot of regulatory attention to the crypto industry and it seems that this investigation is now focusing on how the company marketed the crypto coins.

The company attempted to relaunch Luna 2.0 after the collapse of the first one but has so far failed to gain any traction.

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Members of the SEC are looking into marketing violations this time instead of looking for potential securities violations as it had done for several other digital assets.

CoinDesk reports:

Terra and luna functionally lost all of their value last month. Terraform tried relaunching luna, creating a new token and rebranding the original to luna classic (LUNC).

According to Bloomberg, members of the SEC’s Division of Enforcement are investigating whether investor protection rules were broken through Terraform’s marketing of the tokens.

The agency was already investigating Terraform founder Do Kwon in connection with his role in building the Mirror Protocol, which allows users to trade tokens representing synthetic stocks.

Terraform Labs did not immediately return CoinDesk’s request for comment. Kwon told Bloomberg that he was not aware of any SEC probes into UST and had not heard from the agency.

Additionally, more recent news have revealed that the Second Circuit Court has rejected Terraform Lab’s appeal against the SEC which claims that the SEC did not have jurisdiction over the company.

Still, it seems that due to the fact that it had marked to US investors and employed US personnel, it would still be accountable to the SEC.

It is expected that the case will have further ramifications on how crypto firms are treated within the United States from a regulatory standpoint in the future.

It may also encourage further class action lawsuits from both US authorities as well as private citizens as a result of the case.

TheBlockCrypto reports:

“As the Second Circuit made clear, courts will find jurisdiction, including over foreign persons and issuers, where the US capital markets are accessed, tokens are promoted to US investors, and promoters facilitate secondary trading in the US,” Attorney Philip Moustakis, who left the SEC to join Seward & Kissel’s blockchain and cryptocurrency practice, told The Block in an email.

In the event of a broader legal case, Terraform Labs or any related entity would also likely end up facing the threat of jurisdictional discovery, a process that would put to the public record information potentially establishing links between companies.

Findings can then end up streamlining civil cases, including potential class actions, that would similarly have been on the hunt to establish jurisdiction.

The SEC had not responded to a request for comment as of publication time. The agency generally does not comment on investigations.

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