Terraform Labs Strategizes Bankruptcy Protection for SEC Appeal

In a strategic maneuver amidst Chapter 11 bankruptcy proceedings, Terraform Labs unveils its plan to leverage bankruptcy protection for a decisive appeal against the U.S. Securities and Exchange Commission (SEC). Chapter 11 bankruptcy safeguards may potentially allow the firm to pursue its appeal sans the obligation of posting a substantial bond, thereby reshaping the landscape of its legal battle with the SEC.

The genesis of this tactical move lies in a recent filing to a Delaware Bankruptcy Court on January 30, where Terraform Labs CEO Chris Amani underscored the pivotal role of Chapter 11 bankruptcy in facilitating a viable appeal against the SEC. Renowned for its stablecoin TerraClassicUSD (USTC), Terraform Labs initiated bankruptcy proceedings on January 21, setting the stage for a high-stakes legal showdown.

Typically, mounting an appeal against the SEC would mandate Terraform Labs to furnish a hefty “supersedeas bond” equivalent to 110% of the total judgment—a significant financial commitment. However, with Chapter 11 bankruptcy protections in play, the company may chart its appeal course devoid of this financial encumbrance, thereby altering the dynamics of its legal recourse against the SEC.

This strategic decision is underpinned by a federal judge’s ruling in December, which found Terraform Labs and its founder, Do Kwon, in violation of U.S. law for the unregistered status of two digital currencies—a ruling that injected urgency into the company’s legal strategy.

The SEC’s forthcoming fraud claims trial against Terraform Labs in March looms large, with financial concerns weighing heavily on the company’s strategic calculus. Chris Amani articulated these apprehensions in the court filing, expressing uncertainty regarding the potential magnitude of a monetary judgment and its implications vis-à-vis the company’s financial solvency. Terraform Labs currently holds approximately $28 million in Bitcoin, $7 million in assorted cryptocurrencies, and around $87 million in its proprietary token, Luna.

At the heart of Terraform Labs’ appellate argument lies the contention that the SEC lacks jurisdiction over the company, contending that its cryptocurrency tokens do not fall under the purview of “securities.” Traditionally, such an appeal would necessitate posting a substantial bond. Nonetheless, Terraform Labs asserts that Chapter 11 bankruptcy protection offers a unique avenue for appeal without the formidable financial burden of a bond requirement.

With assets and liabilities in the $100 million-$500 million range, Terraform Labs is resolute in navigating the bankruptcy process while steadfastly advancing its contributions to the cryptocurrency domain. Notably, the SEC’s legal case against Terraform Labs has encountered a delay until April, owing to extradition proceedings for Do Kwon from Montenegro, providing a temporal reprieve amidst the unfolding legal saga.