A small apparel company called Beba is suing the SEC in a Texas federal court in a dispute over whether a crypto token is a security. What makes this particularly noteworthy is that the challenge comes before the SEC has contacted or sanctioned Beba.

Like some other crypto-industry players, the company is claiming the SEC has engaged in an unlawful pattern of enforcement actions, and it seeks to compel the regulator to create a clear set of rules so cryptocurrency firms can be on better legal footing.

The Waco-based business sells backpacks and other travel goods online. It has created a number of tokens that it wants customers to use to buy exclusive Beba merchandise, and it wants its potential customers to be able to receive the tokens into crypto wallets in what’s known as an airdrop.

Beba filed for a declaratory judgment on Monday, asking the court to state its opinion on the matter before any legal injury occurs.

Tokens for cool clothes

That matter relates to Beba’s creation of tokens (which could be exchanged for exclusive merchandise), and a recent free distribution of them to crypto wallets.

In its lawsuit, Beba makes two arguments:

• It’s not a securities transaction: An airdrop is not a securities transaction because there is no “common enterprise” between the issuer and the recipients. And a token with no reasonable expectation of profit based on the effort of others is not an investment contract.
• The APA argument: The lawsuit’s second claim, on which the decentralized finance advocacy group DeFi Education Fund is joining as co-plaintiff, asserts that the SEC adopted a new policy – without notice – since chairman Gary Gensler’s 2021 appointment. Beba and DeFi Education Fund argue that the SEC has violated the Administrative Procedures Act (APA) by drastically increasing the number of enforcement actions – often taking contradictory legal theories along the way – against industry participants. And it says the agency adopted a new policy against decentralized finance companies without any notice since Gary Gensler was appointed in 2021.

Crypto asset exchanges

Last month, Fort Worth-based crypto company Lejilex and lobbying group Crypto Freedom Alliance of Texas sued the SEC, saying the regulator had asserted jurisdiction over the industry without a “clear statutory mandate, and asking a judge to rule that digital assets traded on exchanges are not securities.

In June 2023, the SEC initiated legal action against two of the largest and most influential crypto asset exchanges in the world, Binance and Coinbase. Hearings were held for both in January, and the outcome of them could be game-changers for the entire cryptocurrency industry, as they could set important precedents for how digital assets are regulated in the future.   

The SEC has alleged the companies have each unlawfully operated as unregistered securities exchange, broker, and clearing agency, among other charges. The crux of both cases is whether the SEC has the legal authority to regulate cryptocurrencies. 

What’s particularly interesting about the Beba case and others is that they are arguing (either offensively or defensively in court) that it’s the securities regulator that’s run afoul of the law – and not them.