Quick Take

• Terraform Labs and Do Kwon appealed the SEC’s subpoenas against them regarding Mirror Protocol.


• The Second Circuit has upheld the subpoenas, according to a summary order filed yesterday.

Terraform Labs and its CEO Do Kwon must comply with Securities and Exchange Commission (SEC) subpoenas related to the Mirror Protocol, according to a ruling on Wednesday from the US Court of Appeals for the Second Circuit. 

The SEC is investigating whether Terraform and Kwon were involved in selling unregistered securities through the Mirror Protocol, which lets users trade crypto tokens that represent popular stocks like Apple and Amazon.

The regulator served Kwon with papers at Messari's crypto conference, Mainnet, in New York in September 2021. Kwon and Terraform appealed, saying the SEC violated its own rules when it served Kwon in person and the court lacked jurisdiction due to Terraform's lack of contact with the US.

The court overturned both arguments. It found the SEC followed the rules and that Terraform's counsel was not authorized to receive filings, hence why Kwon had to be served in person. It said the way Terraform understood the rules would involve "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."

On the second element, the court upheld the view that there were seven contacts with the US. It said that Terraform Labs and Kwon promoted the tokens to US-based consumers and investors, that they retained US employees and had agreements with US-based entities to trade the tokens (noting one $200,000 deal with an unspecified exchange). When setting up an agreement with one company, they said that 15% of Mirror Protocol users are based in the US, according to the filing. The court also dismissed arguments to the contrary.

This lawsuit is unrelated to the dramatic collapse of the Terra blockchain last month, which saw its native token luna suffer a death spiral as its supply rose exponentially. This was due to its relationship with the stablecoin TerraUSD (UST), which lost its peg to the US dollar and lost nearly all of its value. Both projects lost a combined market cap of around $40 billion.

The blockchain has since been recreated with a token airdrop to former holders but investors only received a fraction of what they lost.

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