Terraform Labs Says Bankruptcy Protection Will Help Appeal SEC Lawsuit

Terraform Labs, the developer behind the Terra blockchain ecosystem, said its recent Chapter 11 bankruptcy filing will enable it to pursue a “do-or-die” appeal in a securities fraud case brought by the United States Securities and Exchange Commission (SEC).

In a Jan. 30 filing to a Delaware Bankruptcy Court, Terraform Labs CEO Chris Amani highlighted the significance of bankruptcy protection for the company’s operations and the preservation of value for creditors and stakeholders. The firm filed for Chapter 11 bankruptcy in the US Bankruptcy Court for the District of Delaware on Jan. 21 due to potential financial constraints in dealing with an unresolved judgment and pursuing an appeal with the SEC.

The company said:

“[The bankruptcy protection] is critical to the Debtor’s ability to operate as a going concern, preserve value for its creditors and stakeholders (including the Terra community), and pursue an appeal of the SEC Enforcement Action.”

Normally, an appeal against the SEC would necessitate Terraform Labs to pay a “supersedeas bond” equivalent to 110% of the total judgment amount before it could proceed. However, the company can appeal without posting a bond under Chapter 11 protection.

Terraform Labs Vs. SEC 

The SEC charged the firm and its co-founder, Do Kwon, with securities fraud in February last year. The regulator said the team orchestrated a “multi-billion dollar crypto asset securities fraud” while raising billions from investors by offering interconnected crypto asset securities, many of which were “unregistered transactions.”

Judge Jed Rakoff of the US District Court for the Southern District of NY sided with the regulator’s claim that Terra offered unregistered securities in a summary judgment issued in December. Amani reiterated the firm’s disagreement with the District Court’s summary judgment. He emphasized that the cryptocurrency tokens in question are not securities under the relevant Acts.

Moreover, Amani revealed in court documents that the company owns about $28 million in Bitcoin, $7 million in other cryptocurrencies, and $87 million in Luna tokens. He said the upcoming appeal will argue that the SEC has no authority to charge the firm or its co-founder. The recent filing comes about two weeks after the regulator agreed to postpone Kwon’s upcoming fraud trial to March 25.

Kwon’s Terra Money ecosystem collapsed in May 2022 due to “crypto winter.” He was arrested in Montenegro in March 2023 for attempting to travel with false documents. Kwon awaits his extradition while the US court pushed the SEC’s case against Terraform and Kwon to late March.