The Crypto Freedom Alliance of Texas (CFAT) and digital asset company Lejilex have sued the United States Securities and Exchange Commission (SEC), demanding that the court rule on the status of digital assets sold on the secondary market.
CFAT and Lejilex filed suit against the SEC in the Northern Texas District Court in Fort Worth on Feb. 21. Lejilex is planning to launch a crypto exchange called Legit.Exchange. According to his LinkedIn profile, Lejilex co-founder Mike Wawszczak is an attorney and general counsel of Alliance DAO.
The suit alleges one count against the SEC, citing the Declaratory Judgment Act and a 2007 case as a precedent. The plaintiffs are asking the court for several rulings, including:
“a. Declare that secondary-market sales of digital assets like the ones that LEJILEX intends to facilitate through the Legit.Exchange are not sales of securities as defined by the Exchange Act of 1934 and the Securities Act of 1933”
In addition, they ask that the court declare that Legit.Exchange is not an unregistered securities exchange and Lejilex will not be an unregistered broker or an unregistered clearing agency by operating the exchange.
The plaintiffs argued that “the SEC’s recent enforcement actions embrace the novel position that nearly all digital asset transactions involve ‘investment contracts’ under the federal securities laws.”
Related: SEC lawsuits against Binance and Coinbase unify the crypto industry
It continued, “That position threatens law-abiding participants in the digital asset industry with an imminent risk of being subjected to SEC enforcement actions for failing to comply with the SEC’s exaggerated understanding of its own authority.” The complaint went on to say:
“Despite repeated pleas from industry participants, the SEC has refrained from issuing any explicit regulation setting forth its new position, which would require the agency to subject its reasoning to the crucible of notice-and-comment rulemaking.”
Lejilex described Legit.Exchange as a noncustodial digital asset trading platform that uses smart contracts to allow users to trade with each other. Users would never know each other’s identities. Lejilex would control which assets could be traded and carry out functions like verification in return for a fee, but it would not have custody of user assets. Its website stated that the company plans to launch Legit.Exchange by the end of the year.
So this is huge. Today, @LEJILEX and the Crypto Freedom Alliance of Texas (CFAT) sued the SEC seeking a declaration that “secondary-market sales of digital assets like the ones that LEJILEX intends to facilitate through the https://t.co/FrN5OiTwYN are not sales of securities.”…
— Amanda Tuminelli (@amandatums) February 21, 2024
Lejilex was founded in 2023, according to its website. Its X (formerly Twitter) presence dates to September. CFAT was founded in September as well. Other backers of the nonprofit include a16z crypto, Coinbase, Ledger, Bain Capital Crypto, Blockchain Capital and Paradigm.
The suit discussed the Howey test at length. It also cited the Wahi case and the SEC actions against LBRY,Binance and numerous others.