LUNA Tokens' Security Classification Spells Regulatory Challenges for Terra Blockchain

E. LUNA

209. LUNA was a token native to the Terra blockchain, created by Terraform and its founder, Do Kwon. The Terra blockchain was launched in April 2019 along with the creation of one billion LUNA tokens.

210. At all relevant times, Terraform and Kwon retained hundreds of millions of LUNA tokens for themselves.

211. At least one “bridge,” called “Shuttle,” allowed LUNA holders to create “wrapped” versions of LUNA (“wLUNA”). The wLUNA tokens were identical in all material respects to LUNA, except that they could be traded on the Ethereum blockchain, as opposed to the Terra blockchain.

212. From the time of their offerings through at least May 2022, LUNA and wLUNA were offered and sold as investment contracts and therefore securities.

213. Investors tendered fiat currency and/or crypto assets to obtain LUNA and wLUNA.

214. Each unit of LUNA was fungible with and was indistinguishable from any other unit of LUNA. Each unit of wLUNA was fungible with and was indistinguishable from any other unit of wLUNA. LUNA and wLUNA prices were the same, and they were exchangeable with each other on a one-to-one basis. Any holder of wLUNA had the right and ability at any time to exchange the wLUNA for LUNA.

215. Thus, investors in LUNA and wLUNA shared equally in price increases and decreases, such that if one investor profited, all investors did so as well in equal proportion to their total LUNA or wLUNA holdings.

216. LUNA or wLUNA was first made available for trading through MetaMask Swaps in January 2021.

217. The repeated drumbeat of information Terraform publicly disseminated about LUNA or wLUNA and Terraform’s plans to undertake efforts to make those assets more valuable led reasonable investors, including those who purchased LUNA or wLUNA since January 7, 2021, to view LUNA and wLUNA as investments into Terraform’s efforts. Specifically, LUNA and wLUNA holders would reasonably expect to profit from Terraform’s efforts to grow the Terraform blockchain because this growth would in turn increase the demand for, and the value of, LUNA and wLUNA.

218. Terraform and Kwon told investors that Terraform would use proceeds from LUNA sales to fund operations and help build and expand the Terraform ecosystem. For example, in a July 2018 token sale agreement, Terraform represented to potential investors that the funding round was “in furtherance of the establishment and operation of the systems” to be developed by Terraform.

219. In a 2021 public interview, Terraform’s business development lead stated that LUNA “is the ‘equity’ in our co[mpany].”

220. On April 7, 2021, Kwon posted on X, “in the long run, $Luna value is actionable—it grows as the ecosystem grows.” Luna holders could simply “sit back and watch me kick ass.”

221. The Terraform Director of Special Projects similarly stated in a June 2021 video presentation, “[o]wning LUNA is essentially owning a stake in the network and a bet that the value will continue to accrue over time.”

222. In marketing materials, Terraform further touted the professional expertise of its team, claiming that Terraform was “led by serial entrepreneurs” and was a team with “deep relevant expertise.”

223. On December 28, 2023, based on these facts, and others, a federal court in the Southern District of New York found that both LUNA and wLUNA have been offered and sold as investment contracts. SEC v. Terraform Labs Pte. Ltd et al., 23-cv-1346, 2023 WL 8944860 (S.D.N.Y. Dec. 28, 2023).