Texas Apparel Company and Digital Asset Advocacy Nonprofit File Suit Against the SEC for Aggressive and Secretive Enforcement That Threatens Ability to Operate
Beba, an American apparel company based in Waco, Texas, and the DeFi Education Fund, a leading nonpartisan, nonprofit research and advocacy group, filed a complaint today against the U.S. Securities and Exchange Commission challenging the SEC's aggressive pattern of regulating by enforcement against token creators and digital asset industry participants. In taking this legal action, Beba seeks a court order to protect its growing business from the SEC's years-long unlawful enforcement campaign targeting businesses who create and airdrop digital assets. The plaintiffs are also seeking clarity from the court regarding the boundaries of the SEC's authority to regulate digital assets, so that industry participants can operate pursuant to rules that are clearly communicated and that have gone through a rulemaking process.
"The SEC's unjust and ad-hoc enforcement campaign threatens businesses of all kinds, including companies like Beba who want to be able to use innovative technologies for legitimate business reasons," said Miller Whitehouse-Levine, CEO of the DeFi Education Fund. "Every single one of us in this industry, including the DeFi Education Fund, is harmed by their overreach. We are asking the court to put an end to the SEC's arbitrary abuse of its authority."
The case was filed in the United States District Court for the Western District of Texas. The complaint alleges that the SEC unlawfully pursues a strategy of targeting businesses in the digital asset industry after adopting an unwritten rule that most digital assets are securities, including those distributed by "airdrop" for free. Beba is asking the court to rule that $BEBA tokens are not themselves investment contracts and a free airdrop of a $BEBA token is not a securities transaction. The DeFi Education Fund joins Beba in asking the court to hold the SEC to the Administrative Procedure Act, which requires federal agencies to adopt new rules in writing and through an open process with opportunity for public notice and comment, so that people can weigh in on and be aware of the rules they're expected to follow.
Beba and its co-founders, Jonathan and Nathan Hennigh, are entrepreneurs who launched the apparel company with a mission to showcase beautiful handmade goods of Kenya, where they grew up, while investing in the talent and resources of local craftspeople. Now based in Texas, they have freely distributed $BEBA tokens to potential customers, which can be redeemed to unlock an exclusive Beba product to purchase at a discounted price. The company airdropped the $BEBA tokens as a marketing tool to improve the way that consumers interact with Beba's business, increase brand awareness and reach a wider community of potential customers.
As noted in the suit, despite the SEC's stated belief that nearly all digital assets are securities, the suit alleges that the $BEBA tokens are not an investment contract and the airdrop was not a securities transaction. Because $BEBA tokens were given away for free, there was no "investment of money" by recipients of the airdrop, a necessary prong of the Supreme Court's test for determining whether an investment contract exists, described in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). The suit also alleges that the remaining Howey prongs are not met because $BEBA token holders are not in a common enterprise with Beba and do not have a reasonable expectation of profit derived from the efforts of others.
"Like any business owner, I'm always thinking about new and innovative ways to reach more customers, grow support for our products, and build more awareness of Beba's mission," said Nathan Hennigh, co-founder of Beba. "Unfortunately, my brother and I are operating in a state of constant uncertainty because of the SEC's dangerous track record of haphazardly going after businesses that use digital assets just like our $BEBA token. It's hurting American innovation and causing unnecessary chaos in the market. All we're asking for are clear rules of the road ? not fear of getting into trouble for crossing an invisible line."
Currently, the SEC has not been granted explicit authority by Congress to regulate digital assets. Nor has Congress passed legislation defining digital assets as securities, though it is actively considering doing so. Both parties believe a declaratory judgment in their favor would send a powerful message needed to protect America's economic competitiveness and the future of domestic innovation in a nearly $3 trillion industry.
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