We secured dismissal of the action in its entirety

On March 31, 2022, Davis Polk secured the dismissal of a federal securities class action against Binance, a decentralized, non-U.S. cryptocurrency trading platform, as well as Binance’s Chief Executive Officer, Chief Marketing Officer and Chief Technology Officer. The case is captioned Lee, et al. v. Binance, et al., 1:20-cv-2803-ALC (S.D.N.Y.).

The complaint, originally filed on April 3, 2020, and as subsequently amended, alleged that plaintiffs executed transactions on Binance – the world’s largest crypto trading platform by volume – to buy and sell certain digital tokens. Plaintiffs alleged that Binance unlawfully operated as an unregistered exchange and an unregistered broker-dealer, and unlawfully solicited the sale of unregistered securities (i.e., the tokens). The complaint asserted claims under section 12(a)(1) of the Securities Act of 1933 based on the sale of the unregistered tokens and under section 29(a) of the Securities Exchange Act of 1934 based on Binance’s alleged failure to register; in addition, the complaint asserted 149 causes of action under various state Blue Sky laws.

Davis Polk moved to dismiss, contending, among other things, that plaintiffs’ claims were untimely under the applicable statutes of limitations and that neither the federal nor state laws under which plaintiffs asserted claims applied extraterritorially to Binance or the subject transactions.

On March 31, 2022, Judge Andrew L. Carter issued a memorandum and order dismissing the complaint in its entirety, accepting Davis Polk’s limitations and extraterritoriality arguments in all material respects. First, the court held that all of the claims are untimely under the applicable statutes of limitations. The Securities Act claims were barred by the one-year statute of limitation because virtually all of the relevant purchases occurred more than one year before plaintiffs filed the complaint and the limitations period is not subject to tolling. Claims as to two tokens that were purchased within one year of the complaint also were untimely because the claims were asserted more than one year after the only conduct by Binance alleged to have constituted the “violation” – i.e., Binance’s alleged republication of white papers and research relating to those tokens. The Exchange Act claims, which are subject to a “discovery rule” that tolls the one-year statute of limitations until a plaintiff could have become aware of the alleged wrongdoing through the exercise of reasonable diligence, were untimely as well. The court rejected plaintiffs’ contention that they could not have discovered that the tokens were securities until the SEC published a “framework” explaining its interpretation of preexisting securities law. The court further accepted Davis Polk’s argument that tolling, even if it applied, could not save plaintiffs’ Exchange Act claims that Binance operated as an unregistered exchange, because the complaint alleged that plaintiffs knew Binance was not a registered exchange. In addition, the court held that tolling applies only to facts, but the SEC’s framework “revealed” no new facts about the tokens at issue being securities. Rather, it contained only the SEC’s application of existing law.

Separately, the court held that plaintiffs’ claims could not proceed because neither federal nor state securities laws apply extraterritorially. On this point, the court accepted Davis Polk’s arguments that Binance is not a “domestic exchange” because it is not registered as a national securities exchange under the Exchange Act, and the complaint does not sufficiently allege that Binance maintains exchange facilities within the United States. Plaintiffs’ allegations that Binance utilizes the services of third parties that maintain computer networks in the United States, and that Binance allegedly posted some job listings in the United States were not sufficient to plead that Binance was required to register. Further, plaintiffs had not alleged any domestic transactions subject to the securities laws because allegations that plaintiffs were in the United States when they placed orders for the relevant tokens are insufficient, and the complaint did not allege anything else about where the relevant purchases occurred. Accordingly, the court dismissed all of the federal claims. Finally, the court held that plaintiffs’ various state Blue Sky law claims were barred for the same reason – lack of nexus between the states and the alleged transactions.

This decision further develops the extraterritorial limitations of the U.S. securities laws applicable in the emerging areas of “DeFi” (decentralized finance) and crypto asset trading.

The Davis Polk team includes partner James P. Rouhandeh, counsel Daniel J. Schwartz and associates Isaac M. Gelbfish, Marie Killmond and Shanaye Carvajal. All members of the team are based in the New York office.