Terraform Labs Files for Bankruptcy to Aid SEC Battle, Challenges Jurisdiction Over Crypto Holdings

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The Terra community doesn’t seem to catch a break lately. Terraform Labs filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on Jan. 21, according to the court’s website. The aim is to bolster its appeal against the SEC lawsuit. CEO Chris Amani cites bankruptcy protections, potentially avoiding a supersedeas bond. The appeal challenges the SEC’s authority, arguing crypto assets aren’t securities. 

The company’s is all set for its first U.S. bankruptcy hearing today. They’ve filed for Chapter 11 bankruptcy to boost their defense against a lawsuit from the US SEC. This bankruptcy move might help them avoid a hefty bond typically required for such appeals.

CEO Chris Amani explained in the filing that this step could eliminate a major financial burden, benefiting the company and its community. The bankruptcy filing reveals the company’s assets and liabilities range from $100 million to $500 million, with 100 to 199 creditors.

The SEC had charged Terraform Labs and co-founder Do Kwon with a “multibillion-dollar crypto asset securities fraud” involving their stablecoin TerraClassicUSD and Luna. A recent court ruling supported the SEC’s claim, setting the stage for another FTX-like bankruptcy trial.

In the U.S. District Court for the Southern District of New York, Judge Jed Rakoff agreed with the SEC’s claim in December that Terra had offered unregistered securities. This ruling supported the SEC’s case against Terra, adding legal weight to the accusations of securities law violations by the company. 

In response, Amani stated that their upcoming appeal challenges the SEC’s authority, arguing that their crypto assets are not securities and that the SEC lacks jurisdiction. The company’s treasury holds about $28 million in Bitcoin, $7 million in various crypto, and around $87 million in Luna.

This development follows the SEC’s agreement to delay Kwon’s trial to March 25 as he awaits extradition. If sent to South Korea, Kwon faces a potential 40-year jail sentence for alleged crimes committed there. In a nutshell, Terraform Labs is using bankruptcy to strengthen its position against the SEC, aiming to navigate the legal storm and protect its interests.