Crypto.com, a Billion-Dollar Sports Advertiser, Sues SEC Amid Probe

10/09/2024 00:42

Crypto.com, whose prominent sports partnerships include UFC and naming rights to the Los Angeles Lakers’ arena, is suing the U.S. government claiming it is overstepping its jurisdiction regarding cryptocurrencies and securities law. The company’s suit, announced Tuesday morning, comes immediately after the U.S. Securities and Exchange Commission (SEC) served it with a Wells notice, …

The company’s suit, announced Tuesday morning, comes immediately after the U.S. Securities and Exchange Commission (SEC) served it with a Wells notice, an indication that the commission has wrapped up an investigation and is likely to charge the company with securities violations. Crypto.com claims the SEC is illegally acting outside of its authority, is using legal action as a substitute for rulemaking, and that the company’s tokens are not securities under federal law.

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“We are [suing] to protect the future of the crypto industry in the U.S.,” Crypto.com said on its website, “joining a series of our peers who are actively defending themselves and taking action against a misguided federal agency acting beyond its authorization under the law.”

The lawsuit, and the government’s investigation, could have big ramifications in sports. As cryptocurrency grew in popularity over the past half decade—particularly among young retail investors—marketplaces like Crypto.com mushroomed in popularity. In a race for customers in that specific demographic, many turned large marketing budgets to sports. It seemed a boon for U.S. leagues and teams: a new set of deep-pocketed companies whose partnerships didn’t really infringe on any existing corporate deals.

Sports Deals

Crypto.com made a bigger splash than most, committing more than $1 billion over the past few years. In July 2021, it inked a 10-year, $175 million deal with UFC, at the time the biggest sponsorship in the MMA company’s history. It was UFC’s first fight kit partner, meaning its logo appears on every athlete that steps into the octagon. Six months later, it reached a 20-year deal worth more than $700 million to rename the Staples Center, the home of the Los Angeles Lakers and Los Angeles Kings, as Crypto.com Arena. The company has other sports deals with groups like the Montreal Canadiens, F1, UEFA and Italy’s Serie A.

The big dollar figures helped paper over concerns about cryptocurrency’s downsides, its regulatory future and companies with short track records. Many on the sell-side in sports, according to numerous Sportico interviews, understood the risks of partnering with companies in such a volatile industry, but felt the economics offset the risk of deals not being seen through to completion. For the AEG-owned arena, for example, the Crypto.com deal has likely already paid more than Staples did over its two decades on the building.

A representative for UFC declined to comment. Representative for AEG and the SEC didn’t immediately respond emails seeking comment.

Other sports crypto deals have already fallen apart. In March 2021, crypto marketplace FTX entered a $135 million deal to be the naming rights partner of the Miami Heat’s home arena. Less than two years later, FTX declared bankruptcy, and founder/CEO Sam Bankman-Fried was later sentenced to 25 years in prison following a very public scandal that rocked the industry. The NWSL was also left in the lurch by partner Voyager Digital, whose assets were acquired by FTX.

Legal Analysis

As Crypto.com tells it, the SEC has expanded its jurisdiction in an area where it lacks statutory authority and has done so through a deficient procedure that violates federal law. The company insists its network tokens are not securities as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934.

Courts—including in an ongoing case involving Shaquille O’Neal and his company’s sale of non-fungible tokens—have painted a muddled picture on the relationship between crypto assets and securities law. If those assets are securities, they become subject to much more regulation, including since their sellers could be deemed unregistered securities broker-dealers. The recognition of crypto assets as securities would effectively raise the cost of doing business for crypto companies and increase their exposure to liability. Crypto.com insists its instruments are not securities, partly because “the SEC has conceded this fact in multiple administrative and federal court cases involving Crypto.com’s competitors.”

The SEC’s alleged “concessions,” Crypto.com argues, makes the agency’s “asserted jurisdiction over secondary-market sales of network tokens” that much more objectionable. Crypto.com also asserts that the SEC has failed to follow required administrative procedures, such as by offering a notice-and-comment period for rule-making, and instead have “invented” a new term, Crypto Asset Security, “out of whole cloth” and without textual support from federal statutes.

The company also chastises the agency for allegedly using litigation, where the agency sues companies in hopes of setting new precedent, as a substitute for rule-making, where there is an open and more collegial process where industry actors have a greater voice. It seeks as remedies a judicial declaration that its tokens are not securities and an injunction that would bar the SEC from enforcing its interpretation of federal law against the company.

To that end, Crypto.com brings four claims, three of which insist the SEC has violated the Administrative Procedure Act (APA). The APA is a federal law that governs how agencies develop and implement rules and regulations under federal statutes; it’s central to the administrative state because it requires agencies to act in accordance with the language of legislation passed by Congress and signed into law by the President. Agencies can run afoul of the APA when they act beyond the scope of the law and, in effect, act as if they have the authority to make laws on their own.

One hurdle for Crypto.com is that agencies are generally accorded high deference by courts. The underlying logic is that agencies act with expertise and know more about a subject matter than a court. Often a challenger to an agency must show it acted arbitrarily or capriciously, which is a lofty standard to meet and generally requires the agency to only show its actions were reasonable and permissible.

But federal agencies—including the SEC—have come under fire in recent court rulings, especially by a U.S. Supreme Court that is wary of agency overreach.

In June, the U.S. Supreme Court held in Loper Bright Enterprises v. Raimondo that courts may not defer to a federal agency’s interpretation merely because the statute is ambiguous. That case centered on a federal agency’s interpretation of a statute to justify the imposition of regulatory fees. Also in June, the Supreme Court sided against the SEC in Jarkesy v. SEC, which centered on a defendant being entitled to a jury trial under the Seventh Amendment when the SEC seeks to impose civil penalties. Although both of those rulings involve different issues than those presented in Crypto.com’s lawsuit, they suggest the company might have legal headwinds at its back as it challenges the SEC.

The SEC might also contend that the controversy is not yet ripe for judicial review. Crypto.com says the SEC is “threatening” enforcement action, but doesn’t say any enforcement action has taken place. The SEC might argue a court should not review this matter if and until the agency moves forward with an enforcement action. At this point, the SEC could argue, the subject matter at issue is more hypothetical than actual.

Crypto’s complaint was filed in a Texas federal district court. As of this writing, it has not yet been assigned to a judge.

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