Do Kwon and Terraform Labs Ordered to Comply With SEC Probe of Mirror Protocol
The US regulator is looking into whether Terraform utilized its Mirror Protocol to market unregistered securities in a case separate from the Terra collapse.
Terraform Labs Must Heed SEC Subpeona
The US Court of Appeals for the Second Circuit ruled on Wednesday that Terraform Labs and its CEO Do Kwon must cooperate with Securities and Exchange Commission (SEC) subpoenas connected to the Mirror Protocol.
The SEC is investigating whether Terraform and Kwon were involved in the sale of unregistered securities via the Mirror Protocol, which allows users to trade crypto tokens that reflect popular equities such as Apple and Amazon.
In September 2021, the regulator presented Kwon with papers at Messari’s Mainnet crypto conference in New York. Kwon and Terraform filed an appeal, claiming that the SEC violated its own standards by personally serving Kwon and that the court lacked jurisdiction owing to Terraform’s lack of engagement with the US.
The court rejected both of the arguments. It determined that the SEC followed the regulations and that Terraform’s counsel was not authorized to receive filings, which is why Kwon had to be served personally.
The court stated that Terraform’s interpretation of the regulations would result in “absurd results by allowing a party to insist on service through counsel, but allow the party to block said service by not authorizing their counsel to receive any filings.”
US Court Rules Terraform Labs Had US Contacts
On the second element, The court upheld the view that there were seven contacts with the US. It was stated that Terraform Labs and Kwon pushed the tokens to US customers and investors, that they kept US staff, and that they had agreements with US entities to trade the tokens (noting a $200,000 settlement with an unspecified exchange).
According to the filing, when putting up an arrangement with one company, they stated that 15% of Mirror Protocol users are situated in the US. In addition, the court rejected opposing arguments.
The ruling makes no mention of whether Terra’s digital assets are securities under US law.
Mirror Protocol has not yet made any statements regarding whether or not it would relaunch on the updated version of the Terra mainnet, which went live on May 27, 2022, as a result of a community vote
Growing Legal Issues Plague Terraform Labs
Both Terraform Labs and Do Kwon have had an especially challenging year up to this point.
Today’s ruling adds pressure to scrutiny following the collapse of TerraUSD (UST) and Terra’s native coin, LUNA. The implosion prompted discussion from regulators all across the world, as government officials highlighted stablecoins as potentially unstable and risky assets.
Terraform Labs cost investors billions of dollars last month as the value of TerraUSD (UST) and LUNA plummeted. Within a week, the network’s market capitalization dropped by about 98%, to around $113 million from nearly $30 billion.
The Terra community subsequently rebooted the network, eliminated the stablecoin, and issued a new LUNA token, rebranding the failed token as “Luna Classic.”
According to CoinMarketCap, the price of the new coin has fallen from $19.54 upon launch to $3.12 at the time of writing.
