The 2nd US Circuit Court of Appeals in Manhattan has revived a class action lawsuit from 2020 in which investors allege that Binance violated US securities laws by selling cryptocurrencies which were not registered with the SEC to US persons, despite not being a US-based company.
Binance was granted a motion to dismiss the original application in March 2022 which led to the appeal. Binance is separately battling the US Securities and Exchanges Commission after it filed 13 charges against the company last year alleging similar violations of US securities laws.
The plaintiffs in this civil action appealed the 2022 decision claiming that Binance offered and sold billions of dollars' worth of tokens, including to US citizens, which were not registered as securities, and damages. The Plaintiffs argued that because they accepted Binance's Terms of Services, were themselves US based, and wired money to Binance from their home states, the transactions entered into fell within US jurisdiction even where Binance was based elsewhere.
While the District Court concluded the plaintiff's claims constituted an impermissible extraterritorial application of US securities law and were outside the applicable statute of limitations, the plaintiffs argued in the appeals court that the transactions are subject to domestic securities law and are within the limitation period. The appeals court unanimously agreed.
we conclude that Plaintiffs have plausibly alleged that the transactions at issue are domestic transactions subject to domestic securities laws because the parties became bound to the transactions in the United States, and therefore irrevocable liability attached in the United States.
The matter will be remitted to the District Court for determination on the facts.
The decision could set a precedent for further claims against international companies engaging with US persons or maintain other nexus to US jurisdiction. While the Court did not find that use of US servers and data centres, like AWS based in California, alone would found US jurisdiction, there was a plausible argument established on the basis of other connections to US jurisdiction in this case.
Our conclusion might be different were we faced with plaintiffs seeking to apply United States securities laws based on the happenstance that a transaction 22 was initially processed through servers located in the United States despite all parties to the transaction understanding that they were conducting business on a foreign-registered exchange.
The principle of comity between Courts in different jurisdictions, whereby one Court may give deference to another which maintains jurisdiction, was also an important consideration in the decision. The fact that Binance was not otherwise regulated or based in another jurisdiction (having no identified headquarters) during the relevant period was a relevant factor in persuading the Court to accept jurisdiction.
since Binance notoriously denies the applicability of any other country’s securities regulation regime, and no other sovereign appears to believe that Binance’s exchange is within its jurisdiction, the application of United States securities law here does not risk “incompatibility with the applicable laws of other countries”
The Court's decision to apply US securities law to transactions that became irrevocable within the United States underscores that while the long arm of US law has its limits, it is nevertheless very long. Any company dealing in digital services of any kind, including cryptocurrency, should carefully consider the extent of any nexus or connections to the United States, which may take various forms, and seek legal advice on compliance with US laws or steps to ensure that they appropriately ring fence their operations to avoid unintended consequences.
By Michael Bacina, Steven Pettigrove and Luke Misthos