Crypto Securities Suit Dismissed For Lack of “Investment of Money”

In Moen v. SocialChain Inc., Magistrate Judge Nathanael M. Cousins of the Northern District of California recently dismissed claims brought under federal securities laws against the developers of Pi Network, a cryptocurrency platform that allows users to mine the platform’s native token—Pi Coin—using a mobile application.  The plaintiff alleged that he joined the Pi Network and began mining Pi tokens using the platform’s mobile app in 2020.  At that time, users of the platform were prohibited from transferring the Pi they had mined prior to launch of the platform’s open mainnet.  The plaintiff alleged that, despite that, the developers had engaged in undisclosed sales of Pi in 2021.  The plaintiff ultimately mined over 6,500 Pi Coin, which he had planned to migrate to the mainnet upon launch, before over 5,000 of his Pi tokens were allegedly transferred from his wallet without his authorization, and lost.  

Among other claims, the plaintiff alleged that defendants’ sales of Pi in 2021 qualified as an unregistered sale of securities in violation of federal law.  The plaintiff also brought claims for securities fraud, alleging that defendants made false and misleading claims regarding Pi and the Pi Network, upon which plaintiff relied in deciding to mine tokens using the platform.

Magistrate Judge Cousins dismissed plaintiff’s securities claims without leave to amend, finding that plaintiff failed to allege that any transactions in Pi qualified as transactions in a security.  The securities laws define a “security” to include various instruments, including, as relevant to plaintiff’s allegations, an “investment contract.”  As outlined in Magistrate Judge Cousins’s ruling, the Supreme Court’s decision in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and its progeny provide a framework for determining whether a particular transaction qualifies as an investment contract, requiring a plaintiff to show “(1) an investment of money (2) in a common enterprise (3) with an expectation of profits produced by the efforts of others.”

Magistrate Judge Cousins concluded that the plaintiff’s allegations failed to satisfy the first prong of the Howey test, which requires that “an investor commit his assets to the enterprise in such a manner as to subject himself to financial loss.”  Plaintiff did not argue that he invested any money in the Pi Network or had otherwise purchased Pi, instead claiming that, in mining Pi, he had expended time and “internet data,” which were “akin to money.”  The Court rejected this argument, further finding that, because the plaintiff conceded that he had not invested money in the platform, these deficiencies could not be cured by amendment.

While most analyses of cryptocurrency transactions under Howey focus on the “common enterprise” or “expectation of profits” prongs of the test, the Moen order is not the first to find that an expenditure of time or energy in exchange for cryptocurrency fails to satisfy the “investment of money” prong.  In SEC v. Ripple Labs, Inc., 682 F. Supp. 3d 308 (S.D.N.Y. 2023), Judge Analisa Torres determined that distributions of XRP to employees, as compensation for services, did not involve an “investment of money” under Howey.  And in SEC v. Binance Holdings Ltd., 738 F. Supp. 3d 20 (D.D.C. 2024), Judge Amy Berman Jackson similarly expressed mild skepticism that distributions of cryptocurrency to employees satisfy the first prong of Howey, without reaching the issue.

While the order permits the plaintiff to amend certain fraud-based claims brought under state law, Magistrate Judge Cousins dismissed plaintiff’s securities claims with prejudice.