The judge overseeing the lawsuit between the Securities and Exchange Commission (SEC) and Coinbase peppered the counsel of the former with questions about how the latter was allowed to go public.
On Thursday, the high-stakes case had a pre-motion hearing in which Katherine Polka Faila, the US District Judge, asked the questions.
According to court documents, she was exploring whether the lack of concerns that the SEC had expressed upon the S-1 filing by Coinbase was significant or not.
S-1
In order to conduct an Initial Public Offering (IPO) that would make their shares available to the public, companies are first required to file an S-1 with the securities regulator.
In April 2021, Coinbase was permitted to make its debut on Nasdaq as its S-1 filing had been declared effective.
Two years after that, the SEC filed a lawsuit against the company and claimed that its business is not in accordance with securities laws.
According to Judge Faila, there is a possibility that the issuance of S-1 might not be that important, but it could have some significance in the case of Coinbase.
She said that since the SEC had issued the S-1, they had essentially told Coinbase that they were doing the right thing.
The argument
The counsel of the SEC argued that the focus on the S-1 form by Judge Faila was misplaced because it is not concerned with the agency’s support or legality of the company’s business.
The counsel said that just because a company is permitted to go public by the regulator does not mean that it approves of the underlying business, or the business structure for that matter.
They further said that the permission did not mean that the said business structure is not violating the securities laws.
Furthermore, the counsel member also said that no evidence had been provided to show that the agency had known what assets were being listed on the exchange.
Likewise, they had not assured Coinbase that the assets they were listing on their platform would not be categorized as security later.
The hearing
The first hearing of the case saw a number of topics being discussed and the S-1 filed by Coinbase was one of them.
Others included the Howey test and also the ‘major questions doctrine’. The comments from Faila offer insight into the judge’s thoughts as the case moves forward.
She expressed some skepticism on the stance of the SEC regarding the S-1 issuance because they could have forewarned Coinbase that its business could prove to be a problem someday.
Faila said that the regulator should have been aware that the business structure of Coinbase was in conflict with securities law at the time of the S-1 issuance.
She went on to say that while the agency does not have to be omniscient, they should still have done their diligence to know what Coinbase was doing.
Steven Peikin, a member of the legal counsel of Coinbase, and formerly a part of the SEC’s enforcement division, said that the judge’s instincts certainly deserved some attention.