Oregon Attorney General Proposes to Prevent Coinbase from Transferring Securities Litigation to Federal Judiciary
In a legal battle that could have far-reaching implications for the cryptocurrency industry, Oregon's Pratt test is at the heart of the ongoing lawsuit against Coinbase. The Pratt test, a broader standard than the federal Howey test, allows Oregon to classify certain crypto assets as securities under state law, even if they might not meet the federal requirements.
Established by the Oregon Supreme Court in 1976 in the case of Pratt v. Kross, the Pratt test focuses on whether investors are led to expect profits primarily from the efforts of others, even if those investors are also somewhat involved in the venture. This makes it easier for Oregon regulators to deem investment schemes, including some crypto offerings, as securities under state law.
In contrast, the federal Howey test, from the SEC v. W.J. Howey Co., requires an investment to meet four elements to be considered a security: (1) investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) to be derived solely from the efforts of others. The Howey test is generally stricter regarding the source of profits, while Pratt expands the focus to "primarily" from others' efforts, even if investors play some minor role.
Coinbase, the San Francisco-based cryptocurrency exchange, initially sought to move the case to federal court, arguing that the dispute involved substantial federal questions. However, Oregon's Attorney General countered that the state applies its own, modified legal test, which does not merely mirror the federal standard but rather broadens what can be classified as a security. This divergence means that crypto assets deemed non-securities under federal law could still be regulated as securities by Oregon, potentially affecting how crypto exchanges operate within the state and complicating industry compliance across jurisdictions.
If other states follow similar broad interpretations, it could lead to a fragmented regulatory landscape, undermining the Securities and Exchange Commission’s (SEC) role and increasing legal risks for crypto businesses. Navodaya Singh Rajpurohit, legal partner at Web3 consulting firm Coinque Consulting, noted that avoiding any interpretation of securities in state enforcement could lead to chaos with all 50 states potentially starting enforcement actions based on their interpretations of securities.
The lawsuit against Coinbase alleges that the company promoted unregistered crypto sales to Oregon residents, violating state securities law. Oregon's Attorney General, Dan Rayfield, filed the lawsuit in April, and the case is currently being contested in state court. Coinbase has argued that the lawsuit is politically motivated and could lead to fragmented state regulation. The exchange's chief legal officer, Paul Grewal, stated that "this pursuit of a patchwork of state regulation only helps politicians and harms consumers."
The case took a new turn in June when Coinbase removed the case to federal court, based on the argument that "state law claims purportedly turn on a substantial question of federal law." However, Oregon's motion accuses Coinbase of lacking an objectively reasonable basis for seeking removal and asks the federal court to send the case back to the home state court. The motion also notes that many of the individuals affected by the alleged violations may have damages too small for individual suits due to arbitration and class action waivers in Coinbase's user agreement.
Rajpurohit pointed out that state courts remain bound by their own Supreme Court precedents, meaning "the Oregon District Court may have to interpret 'investment contract' as per Pratt vs Kross." If the court rules in favour of Oregon, it could set a precedent for other states to follow, potentially leading to a more regulated crypto market within the United States.
[1] Source: Oregon Attorney General's Office [2] Source: Coinbase's court filing
- In the ongoing legal battle between Coinbase and Oregon's Attorney General, the focus lies on the Pratt test, a state law that considers certain crypto assets as securities, even if they might not meet federal requirements.
- Coinbase has faced allegations of promoting unregistered crypto sales to Oregon residents, violating state securities law, as per the lawsuit filed by Oregon's Attorney General Dan Rayfield in April.
- Navodaya Singh Rajpurohit, legal partner at Web3 consulting firm Coinque Consulting, caution that broad interpretations of securities by states could lead to a fragmented regulatory landscape for the crypto industry.
- If other states follow Oregon's lead, they could potentially escalate regulatory complexity for crypto exchanges like Coinbase, potentially jeopardizing operations within those states.
- The lawsuit positions the Pratt test, a modifier of the federal Howey test, as a significant factor in the future interpretation of what constitutes a security in the cryptocurrency industry.
