Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 1 of 55
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`SECURITIES AND EXCHANGE COMMISSION,
`
`Plaintiff,
`
`v.
`
`TERRAFORM LABS PTE LTD. and
`DO HYEONG KWON,
`
`Defendants.
`
`No. 1:23-cv-1346
`
`JURY TRIAL DEMANDED
`
`COMPLAINT
`
`Plaintiff Securities and Exchange Commission (the “SEC” or “Commission”), for its
`
`Complaint against Defendants Terraform Labs PTE Ltd. (“Terraform”) and Do Hyeong Kwon
`
`(“Kwon”) (collectively “Defendants”), alleges as follows:
`
`SUMMARY
`
`1.
`
`From at least April 2018 through May 2022 (“Relevant Period”), Terraform and
`
`Kwon offered and sold crypto asset securities1 in unregistered transactions and perpetrated a
`
`fraudulent scheme that led to the loss of at least $40 billion of market value, including
`
`devastating losses for U.S. retail and institutional investors.
`
`2.
`
`Defendants’ crypto asset securities offerings involved an array of interrelated
`
`tokens that were created, developed, promoted, offered, and sold by Defendants as profit-seeking
`
`investments.
`
`1 As used in this complaint, “crypto asset security” refers to an asset that is issued and/or
`transferred using distributed ledger or blockchain technology – including, but not limited to, so-
`called “digital assets,” “virtual currencies,” “coins,” and “tokens” – and that meets the definition
`of “security” under the federal securities laws. “Security” includes any “investment contract,”
`“security-based swap,” or “receipt for” a security.
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 2 of 55
`
`3.
`
`Terraform and Kwon marketed the crypto asset securities to investors in the
`
`United States and abroad, repeatedly claiming that the tokens would increase in value and
`
`touting Defendants’ managerial and entrepreneurial efforts to do so. For example, Defendants
`
`touted and marketed a Terraform-created “yield-bearing” blockchain protocol, dubbed the
`
`Anchor Protocol, which promised to pay 19-20% interest on one of Terraform’s crypto assets.
`
`4.
`
`Defendants’ efforts at attracting investors and growing the size and value of the
`
`Terraform “ecosystem” were initially successful. By April 2022, one of Terraform’s crypto asset
`
`securities, the LUNA token, had a market value among the ten highest in the world for crypto
`
`assets. And Terraform’s so-called “stablecoin” Terra USD (“UST”) – a crypto asset security that
`
`Terraform designed to maintain a one-to-one peg to the U.S. dollar by virtue of an algorithm
`
`coded into the blockchain tying its value to LUNA – was also among the world’s largest, with a
`
`total market value of over $17 billion as of April 2022.
`
`5.
`
`Defendants also engaged in a fraudulent scheme to mislead investors about the
`
`Terraform blockchain and its crypto asset securities. Terraform and Kwon repeatedly – and
`
`falsely – told the investing public that a popular Korean electronic mobile payment application
`
`called “Chai” employed the Terraform blockchain to process and settle commercial transactions
`
`between customers and merchants. If true, this would have been a breakthrough for the
`
`Terraform blockchain, a supposed real-world use that could increase the value of LUNA as
`
`demand for the token rose in connection with increased use of the Terraform blockchain.
`
`Investors bought in, purchasing LUNA and other Terraform crypto assets, based in part on
`
`Terraform’s and Kwon’s claims that Chai payment transactions were being processed and settled
`
`on the Terraform blockchain. But in reality, Chai payments did not use the Terraform
`
`blockchain to process and settle payments. Rather, Defendants deceptively replicated Chai
`
` 
` 
`
`2
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 3 of 55
`
`payments onto the Terraform blockchain, in order to make it appear that they were occurring on
`
`the Terraform blockchain, when, in fact, Chai payments were made through traditional means.
`
`6.
`
`Terraform and Kwon also misled investors about one of the most important
`
`aspects of Terraform’s offering – the stability of UST, the algorithmic “stablecoin” purportedly
`
`pegged to the U.S. dollar. UST’s price falling below its $1.00 “peg” and not quickly being
`
`restored by the algorithm would spell doom for the entire Terraform ecosystem, given that UST
`
`and LUNA had no reserve of assets or any other backing.
`
`7.
`
`In May 2021, UST dropped below $1.00. In response, Defendants secretly
`
`discussed with a third party that the third party would purchase massive amounts of UST to
`
`restore the $1.00 peg. As UST returned to $1.00, Kwon and Terraform publicly and repeatedly
`
`touted the restoration of the $1.00 UST peg as a triumph of decentralization and the
`
`“automatically self-heal[ing]” UST/LUNA algorithm over the “decision-making of human
`
`agents in time of market volatility,” misleadingly omitting the actual reason why the $1.00 peg
`
`was restored: the third party’s intervention to prop up UST’s price. By late May, Terraform was
`
`publicly boasting to the investing public that it had purportedly proven the reliability of the UST
`
`$1.00 peg – the “lynchpin for the entire [Terraform] ecosystem” – in a “black swan” event that
`
`was “as intense of a stress test in live conditions as can ever be expected.”
`
`8.
`
`After the UST peg was restored in May 2021, investors poured additional billions
`
`of dollars into the Terraform ecosystem, mostly through investor purchases of LUNA and UST.
`
`9.
`
`One year later, in May 2022, under selling pressure from large UST holders, UST
`
`de-pegged from the U.S. dollar again. This time, without secret intervention to save it, the price
`
`of UST and LUNA plummeted to nearly zero, bringing down with them the other crypto asset
`
`securities in the interconnected Terraform ecosystem, wiping out over $40 billion of total market
`
` 
` 
`
`3
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 4 of 55
`
`value in these assets and sending shock waves through the crypto asset community. A number of
`
`retail investors in the United States lost their life savings. And some U.S. institutional investors
`
`lost billions of dollars in the market value of their LUNA and UST holdings.
`
`VIOLATIONS
`
`10.
`
`As a result of the conduct alleged in this Complaint, Defendants violated the
`
`securities offering registration provisions of the federal securities laws, namely Section 5(a) and
`
`5(c) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77e, along with certain
`
`security-based swap provisions of the federal securities laws, specifically, Section 5(e) of the
`
`Securities Act, 15 U.S.C. § 77e, and Section 6(l) of the Securities Exchange Act of 1934
`
`(“Exchange Act”), 15 U.S.C. § 78f(l). Specifically, Defendants offered and sold crypto asset
`
`securities to investors without registering the offers and sales with the SEC as required by the
`
`federal securities laws. Defendants further violated the federal securities laws by offering,
`
`selling, and effecting transactions in securities-based swaps, in the form of “mAssets” based on
`
`the value of underling equity securities, to non-eligible contract participants in transactions that
`
`were not executed on a national securities exchange and without having an effective registration
`
`statement filed with the Commission covering the offer and sale.
`
`11.
`
`Defendants’ conduct set forth in this Complaint also violated the antifraud
`
`provisions of federal securities laws, Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a),
`
`Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, 15 U.S.C. § 78j(b) and 17 C.F.R.
`
`§ 240.10b-5, along with Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).
`
`12.
`
`Unless restrained and enjoined, Defendants will continue to violate the federal
`
`securities laws.
`
`
`
` 
` 
`
`4
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 5 of 55
`
`NATURE OF PROCEEDINGS AND RELIEF SOUGHT
`
`13.
`
`The Commission brings this action pursuant to the authority conferred upon it by
`
`Section 20(b) of the Securities Act, 15 U.S.C. § 77t(b), and Section 21(d)(1) of the Exchange
`
`Act, 15 U.S.C. §§ 78u(d)(1).
`
`14.
`
`The Commission seeks a final judgment: (i) ordering permanent injunctions
`
`restraining and enjoining Defendants from again violating the federal securities laws described
`
`herein; (ii) ordering Defendants to pay disgorgement with prejudgment interest; (iii) ordering
`
`Defendants to pay civil money penalties; and (iv) prohibiting Defendants from (a) participating,
`
`directly or indirectly, in the purchase, offer, or sale of any crypto asset security, or (b) engaging
`
`in activities for purposes of inducing or attempting to induce the purchase, offer, or sale of any
`
`crypto asset security by others; and (v) imposing such other and further relief as the Court may
`
`deem just and appropriate.
`
`DEFENDANTS
`
`15.
`
`Terraform Labs PTE Ltd. (“Terraform”) is a private company registered and
`
`headquartered in Singapore. During the Relevant Period, Terraform had numerous employees
`
`located in the United States, including its General Counsel, Head of Research, and Director of
`
`Special Projects. Terraform also operated a website available in the United States that offered
`
`and sold crypto asset securities to U.S.-based investors and, through its authorized
`
`representatives, often met with investors in the United States to offer and sell Terraform’s crypto
`
`asset securities. Neither Terraform nor its offers or sales of crypto asset securities were
`
`registered with the SEC in any capacity.
`
`16.
`
`Do Hyeong Kwon, age 31, was a resident of Korea and Singapore during the
`
`Relevant Period. Kwon is and was the ultimate decision-maker at Terraform throughout the
`
` 
` 
`
`5
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 6 of 55
`
`Relevant Period. Kwon is also the sole director, Chief Executive Officer, and majority
`
`shareholder of Terraform, owning 92% if its shares. Press reports indicate that a Korean court
`
`issued an arrest warrant for Kwon. His current address is unknown. During the Relevant Period,
`
`Kwon traveled to the United States on behalf of Terraform to market, offer, and sell Terraform’s
`
`crypto asset securities.
`
`JURISDICTION AND VENUE
`
`17.
`
` The Court has subject matter jurisdiction over this action pursuant to Sections
`
`20(b), 20(d) and 22(a) of the Securities Act, 15 U.S.C. §§ 77t(b), 77t(d) and 77v(a), and Sections
`
`21(d) and 27(a) of the Exchange Act, 15 U.S.C. §§ 78u(d) and 78aa(a).
`
`18.
`
`The Court has personal jurisdiction over Defendants and venue is proper in this
`
`District pursuant to Section 22(a) of the Securities Act, 15 U.S.C. § 77v(a), and Section 27(a) of
`
`the Exchange Act, 15 U.S.C. § 78aa(a), because, among other things, some of the acts and
`
`transactions in which Defendants engaged and that constitute violations of the federal securities
`
`laws occurred in this District. For example, as alleged herein, Defendants offered and sold
`
`securities and made materially false and misleading statements to investors located in this
`
`District in unregistered transactions. One or more investors who purchased crypto asset
`
`securities offered by Terraform and Kwon also had their principal place of business and/or
`
`residence within this District.
`
`19.
`
`In addition, this Court has personal jurisdiction over Defendants because
`
`Defendants engaged in conduct within the United States that constituted significant steps in
`
`furtherance of the violations of the federal securities laws alleged in this Complaint, even if some
`
`of the transactions at issue may have occurred outside the United States and involved foreign
`
` 
` 
`
`6
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 7 of 55
`
`investors; and/or further because Defendants, whether within or outside of the United States,
`
`engaged in conduct that had a foreseeable substantial effect within the United States.
`
`20.
`
`In connection with the conduct alleged in this Complaint, Defendants, directly
`
`and indirectly, singly or in concert with others, have made use of the means or instrumentalities
`
`of interstate commerce, the means or instruments of transportation or communication in
`
`interstate commerce, the mails, and/or the facilities of a national securities exchange – namely,
`
`through Defendants’ use of the Internet and the U.S. banking system when engaging in the acts
`
`and transactions described herein.
`
`STATUTORY AND LEGAL FRAMEWORK
`
`21.
`
`Congress enacted the Securities Act to regulate the offer and sale of securities. In
`
`contrast to ordinary commercial principles of caveat emptor, Congress enacted a regime of full
`
`and fair disclosure, requiring those who offer and sell securities to the investing public to provide
`
`sufficient, accurate information to allow investors to make informed decisions before they invest.
`
`22.
`
`Sections 5(a) and 5(c) of the Securities Act require that an issuer of securities like
`
`Terraform register offers and sales of those securities with the SEC when they offer and sell
`
`securities to the public. Registration statements relating to an offering of securities thus provide
`
`public investors with material information about the issuer and the offering, including financial
`
`and managerial information, how the issuer will use offering proceeds, and the risks and trends
`
`that affect the enterprise and an investment in its securities.
`
`23.
`
`The definition of a “security” under the federal securities laws includes a wide
`
`range of investment vehicles, including “investment contracts. See 15 U.S.C. § 77b(a)(1)
`
`(Securities Act Section 2(a)(1)). Investment contracts are instruments through which a person
`
`invests money in a common enterprise and reasonably expects profits or returns derived from the
`
` 
` 
`
`7
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 8 of 55
`
`entrepreneurial or managerial efforts of others. Courts have found that novel or unique
`
`investment vehicles constitute investment contracts, including interests in orange groves, animal
`
`breeding programs, railroads, mobile phones, crypt assets, and enterprises that exist only on the
`
`Internet. As the United States Supreme Court noted in SEC v. W.J. Howey Co., Congress defined
`
`“security” broadly to embody a “flexible rather than a static principle, one that is capable of
`
`adaptation to meet the countless and variable schemes devised by those who seek the use of the
`
`money of others on the promise of profits.” 328 U.S. 293, 299 (1946).
`
`24.
`
` Security based swaps, which are themselves securities, include any agreement,
`
`contract, or transaction that is a swap as defined in Section 1a of the Commodity Exchange Act
`
`(CEA) and is based on a single security, including on the value thereof. See 15 U.S.C.
`
`§ 78c(a)(68) (Exchange Act Section 3(a)(68)). Section 1a(47) of the CEA defines “swap” to
`
`include “any agreement, contract, or transaction” that “provides on an executory basis for the
`
`exchange . . . of 1 or more payments based on the value or level of 1 or more . . . securities . . .
`
`and that transfers, as between the parties to the transaction, in whole or in part, the financial risk
`
`associated with a future change in any such value or level without also conveying a current or
`
`future direct or indirect ownership interest in [the] asset . . . .”
`
`25.
`
`Securities Act Section 5(e) makes it unlawful for any person to offer to sell, offer
`
`to buy, or purchase or sell a security-based swap to any person who is not an “eligible contract
`
`participant” without an effective registration statement. 15 U.S.C. § 77e(e). Exchange Act
`
`Section 6(l) also makes it unlawful for any person to effect transactions in security-based swaps
`
`to any person who is not an “eligible contract participant” unless the transaction is effected on a
`
`registered national securities exchange. “Eligible contract participants” are defined to include
`
`high-net-worth individuals with “amounts invested on a discretionary basis” of $10 million (or
`
` 
` 
`
`8
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 9 of 55
`
`$5 million if the individual enters into a hedging agreement) and certain types of sophisticated
`
`and/or regulated entities. 7 U.S.C. § 1a(18).
`
`BACKGROUND ON CRYPTO ASSETS
`
`26.
`
`The term “crypto asset” generally refers to an asset issued and/or transferred using
`
`distributed ledger or blockchain technology, including assets sometimes referred to as
`
`“cryptocurrencies,” “digital assets,” “virtual currencies,” “digital coins,” and “digital tokens.”
`
`27.
`
`A blockchain or distributed ledger is a peer-to-peer database spread across a
`
`network of computers that records all transactions in theoretically unchangeable, digitally
`
`recorded data packages. The system relies on cryptographic techniques for secure recording of
`
`transactions. Blockchains can also record “smart contracts,” essentially computer programs
`
`designed to execute the terms of a contract when certain triggering conditions are met.
`
`28.
`
`Blockchains typically employ a consensus mechanism to “validate” transactions,
`
`which, among other things, aims to achieve agreement on a data value or on the state of the
`
`ledger. Crypto assets may be traded on crypto asset trading platforms in exchange for other
`
`crypto assets or fiat currency (legal tender issued by a country).
`
`29.
`
`A blockchain “protocol” is a code, software, or algorithm that governs how a
`
`blockchain, or a feature of a blockchain, operates.
`
`30.
`
`On July 25, 2017, the SEC issued the Report of Investigation Pursuant to Section
`
`21(a) of the Securities Exchange Act of 1934: The DAO, advising “those who would use . . .
`
`distributed ledger or blockchain-enabled means for capital raising[] to take appropriate steps to
`
`ensure compliance with the U.S. federal securities laws,” and finding that the offering of crypto
`
`assets at issue in that report involved investment contracts and, therefore, securities. In
`
`analyzing whether something is a security, “form should be disregarded for substance,”
`
` 
` 
`
`9
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 10 of 55
`
`Tcherepnin v. Knight, 389 U.S. 332, 336 (1967), “and the emphasis should be on economic
`
`realities underlying a transaction, and not on the name appended thereto.” United Housing
`
`Found., Inc. v. Forman, 421 U.S. 837, 849 (1975).
`
`FACTS
`
`I.
`
`Defendants Created and Developed the Terraform Ecosystem.
`
`31.
`
` In March 2018, Defendants began creating the Terraform ecosystem. Kwon and
`
`Terraform’s co-founder published a white paper announcing the Terraform blockchain (referred
`
`to as the “Terra protocol”) and the LUNA token, the first crypto asset created by Terraform.
`
`Eventually, the ecosystem would come to include a series of interconnected crypto assets whose
`
`purported adoption, liquidity, and value became highly dependent on the public’s willingness to
`
`buy into Terraform and Kwon’s blockchain empire.
`
`32.
`
` In April 2019, Kwon and others published another white paper, entitled “Terra
`
`Money: Stability and Adoption,” that announced the adoption of so-called “stable-coins,”
`
`including one later named UST, which Terraform described as the “lynchpin” of Defendants’
`
`interrelated “ecosystem” of crypto assets.
`
`33.
`
`In the April 2019 white paper and elsewhere, Defendants stated that UST’s value
`
`was pegged to the U.S. dollar by virtue of an algorithm tying UST’s value to LUNA.
`
`Specifically, this algorithm sought to maintain UST’s price at $1.00 through a complex system in
`
`which, rather than being backed by actual dollars, UST would be created, or “minted,” and
`
`“burned,” or destroyed, in parallel with Terraform’s companion token, LUNA. For example,
`
`holders of LUNA could swap $1.00 worth of LUNA for 1 UST based on LUNA’s then-current
`
`market price. And holders of UST could likewise exchange 1 UST for $1.00 worth of LUNA.
`
`The algorithm theoretically provided an arbitrage opportunity for traders to help keep the price of
`
` 
` 
`
`10
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 11 of 55
`
`UST pegged at one dollar. If, for example, UST slipped to $0.95, traders could buy UST at that
`
`price and exchange it for $1 of LUNA “burning” UST and “minting” LUNA. Doing so reduced
`
`the supply of UST and, in theory, would increase its price until it reached a dollar.
`
`34.
`
`On or about April 24, 2019, Terraform and Kwon officially launched the
`
`Terraform blockchain and created one billion LUNA tokens. Kwon wrote the code underlying
`
`the initial version of the blockchain. As described in more detail below, Terraform and Kwon
`
`offered and sold LUNA to investors to raise funds to develop the Terraform blockchain and
`
`ecosystem. During the Relevant Period, Terraform maintained over a hundred code repositories
`
`that enabled Terraform employees, including Kwon, to create, contribute, maintain, and update
`
`the Terraform blockchain protocols.
`
`35.
`
`Throughout the Relevant Period, Terraform and Kwon continued to develop and
`
`market the Terraform blockchain and related protocols and crypto assets, which they promoted
`
`as profit opportunities for investors. In September 2020, for example, Terraform and Kwon
`
`began publicly marketing UST as a “yield bearing” stablecoin together with something they
`
`called the Anchor Protocol. Terraform launched the Anchor Protocol in March 2021, with
`
`Defendants advertising rates of return of 19-20% on investors’ deposited UST, leading to
`
`significant investor demand for UST.
`
`36.
`
`The total amount of UST, which was first “minted” in June 2019, was slow to
`
`grow, with under 300 million UST circulating by early 2021. In the 2 months following the
`
`launch of the Anchor Protocol, the number of UST in circulation increased by close to one
`
`billion. By May 2022, there were approximately 19 billion UST, with 14 billion deposited in the
`
`Anchor Protocol.
`
` 
` 
`
`11
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 12 of 55
`
`37.
`
`Over time, Defendants created other protocols and crypto asset securities. In
`
`December 2020, Defendants launched the “Mirror Protocol,” which they continued to develop
`
`and maintain. The Mirror Protocol allowed users to create what Terraform called an “mAsset,”
`
`short for “mirrored asset”, which was designed to track or “mirror” the price of equity securities
`
`or other types of securities, including U.S. equity securities. For example, mAssets designed to
`
`“mirror” the stock of Apple, Inc. were named “mAAPL” and were designed so that their value
`
`increased and decreased with the value of Apple, Inc. stock. As Terraform explained on its
`
`website, “mAssets mimic the price behavior of real-world assets and give traders anywhere in
`
`the world open access to price exposure without the burdens of owning or transacting real
`
`assets.”
`
`38.
`
`The Mirror Protocol also provided users with the ability to obtain a “MIR token,”
`
`the so-called “governance token”2 for the Mirror Protocol. MIR tokens received value based
`
`upon, among other things, fees generated under the Mirror Protocol.
`
`II.
`
`Terraform’s Crypto Assets Were Offered and Sold As Securities.
`
`39.
`
`As alleged in greater detail below, Terraform offered and sold five groups of
`
`crypto asset securities: LUNA tokens, a version of LUNA called “wrapped” LUNA, UST, MIR
`
`tokens, and security-based swaps or mAssets. Defendants solicited investors for these crypto
`
`assets by touting their profit potential. Defendants repeatedly stated that the crypto assets would
`
`increase in value based on Terraform’s development, maintenance, and promotion of its
`
`blockchain, protocols, and the entire Terraform ecosystem. Defendants also promoted to
`
`                                                            
`2 “Governance tokens” are tokens that can, among other features, purportedly give their holders
`voting power over the development and structure of the protocol or blockchain, including the
`right to propose changes.
` 
`
`12
`
` 
` 
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 13 of 55
`
`investors the ability to trade Terraform’s crypto assets on the secondary market, with the success
`
`of the investment again depending on Defendants’ efforts.
`
`40.
`
`Defendants further touted the professional expertise and success of the Terraform
`
`team, including Kwon, claiming that Terraform was “led by serial entrepreneurs” and was a team
`
`with “deep relevant expertise,” and providing biographies or links to LinkedIn profiles that
`
`highlighted Terraform employees’ and Kwon’s expertise in crypto assets, finance, and technical
`
`experience with software coding, engineering, and development.
`
`41.
`
`In addition, Defendants advertised their considerable efforts to ensure that UST –
`
`the “lynchpin of the [Terraform] ecosystem” – maintained its $1.00 peg. In January 2022,
`
`Defendants announced the creation of the “Luna Foundation Guard,” which had no employees
`
`and was controlled by Kwon, with the purpose of serving as an “asset reserve [] to back the
`
`UST.” The Luna Foundation Guard was funded with a “gift” of 50 million LUNA (at the time,
`
`worth billions of dollars) directly from Terraform.
`
`42.
`
`Defendants also aggressively marketed Terraform’s crypto asset securities to U.S.
`
`investors, by posting information and promotional materials to accounts on several publicly
`
`accessible online social media platforms, such as Twitter accounts, blog posts, YouTube, and
`
`messaging applications like Telegram. Kwon and other Terraform employees further gave
`
`interviews or quotes to media promoting its crypto assets, including U.S.-based outlets, as
`
`described in greater detail below.
`
`43.
`
`Additionally, during the Relevant Period, Kwon and other Terraform employees
`
`traveled to the United States to meet personally with existing and potential investors to solicit
`
`investment in Terraform’s crypto asset securities, including meetings in San Francisco and New
`
`York, and to attend and speak at an industry conference and events in New York. Defendants’
`
` 
` 
`
`13
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 14 of 55
`
`U.S.-based promotional efforts also included a partnership with the Washington Nationals
`
`baseball team, as a result of which the word “Terra” was placed on every seat behind home plate
`
`and elsewhere around the stadium in Washington, D.C. Defendants also arranged to have
`
`several of their crypto assets listed (made available for trading) on several major crypto asset
`
`trading platforms, including a prominent U.S.-based trading platform.
`
`A.
`
` LUNA
`
`1.
`
`Investment of Money.
`
`44.
`
`Investors tendered fiat currency or crypto assets in exchange for LUNA.
`
`Institutional investors typically purchased LUNA directly from Terraform after meeting with
`
`Kwon in person or via videoconference. U.S. retail (or non-institutional) investors, who
`
`purchased LUNA from crypto asset trading platforms, including at least one trading platform in
`
`the U.S., also tendered fiat currency or crypto assets in exchange for LUNA.
`
`2.
`
`Common Enterprise.
`
`45.
`
`Purchasers of LUNA invested into a common enterprise with other LUNA
`
`purchasers, as well as with Terraform and Kwon.
`
`46.
`
`Terraform and Kwon pooled the funds received from investors to develop the
`
`Terraform ecosystem and increase the value of LUNA. Investors in LUNA shared equally in
`
`LUNA price increases, or suffered LUNA price decreases equally, such that if one investor
`
`profited, all investors did so as well. Because LUNA is fungible, the fortunes of LUNA
`
`purchasers were tied to one another, and each depended on the success of Defendants’ efforts
`
`and strategy and the Terraform ecosystem.
`
`47.
`
`Specifically, proceeds of Terraform’s sales of LUNA were sent to crypto asset
`
`wallet addresses controlled by Terraform to fund Terraform’s efforts to develop and fund
`
` 
` 
`
`14
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 15 of 55
`
`operations. During fundraising presentations, Terraform and Kwon explained how Terraform
`
`would use proceeds from LUNA sales to help grow and expand the Terraform ecosystem. For
`
`example, in August 2018, when Terraform announced its first raise of capital of $32 million, it
`
`noted that “Terra will invest the initial seed capital in building the modern financial system on
`
`the blockchain.” In fact, Terraform presentations to investors stated that at least 20% of the
`
`initial billion LUNA tokens were to be used for development and operations.
`
`48. Moreover, throughout the Relevant Period, Defendants held a significant amount
`
`of LUNA, tying their fortunes with respect to LUNA with LUNA investors’ fortunes. Terraform
`
`owned hundreds of millions of LUNA tokens through the Relevant Period. In 2020, Kwon
`
`tweeted that he had purchased 50 million LUNA, in addition to the 70 million LUNA tokens that
`
`he owned from the time of the blockchain launch in 2019.
`
`Reasonable Expectation of Profits From Defendants’
`Managerial Efforts.
`
`3.
`
`
`Investors in LUNA reasonably expected to profit from Defendants’ efforts to
`
`
`49.
`
`develop and support the Terraform ecosystem.
`
`50.
`
`Defendants publicly pitched LUNA as an investment that would increase in value
`
`with increased usage of the Terraform blockchain that could result from Defendants’ continued
`
`development and maintenance. Defendants publicly stated that as the Terraform ecosystem grew
`
`based on Defendants’ efforts, the value of LUNA would go up as well. As Kwon explained in an
`
`April 7, 2021 thread on Twitter (referring to LUNA as “moon”):
`
` 
` 
`
`15
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 16 of 55
`
`51.
`
`In the same April 7, 2021 thread, Kwon explicitly touted that the value of LUNA
`
`could grow as the Terraform “ecosystem” grows, specifically tying that potential growth to his
`
`own efforts (which he promised would be successful by touting that he would “kick ass”) while
`
`investors remained passive (or “s[a]t back”) in the enterprise.
`
`
`
`52.
`
`As one Terraform employee put it in Terraform’s publicly-available Telegram
`
`messaging application, the “[v]alue of Luna grows as Terra [ecosystem] gets adopted and used.”
`
`
`
` 
` 
`
`16
`
`

`

`Case 1:23-cv-01346-JSR Document 1 Filed 02/16/23 Page 17 of 55
`
`Another Terraform employee noted in an online Ask-Me-Anything interview on Reddit: “[i]n the
`
`long-run … Terra’s transaction volume will be the main determinant of Luna’s value.”3
`
`53.
`
`In marketing materials distributed to potential investors in January 2019,
`
`Terraform described purchases of LUNA as “investments” and LUNA buyers as “investors.”
`
`The same materials noted that “top global exchanges and funds” already had “invested in”
`
`Terraform (referring to their purchase of LUNA), and that Terraform had raised $32 million in
`
`July 2018 from an “elite group of VCs” referring to venture capital firms.
`
`54.
`
`Some of Terraform’s offers and sales of LUNA were governed by purchase
`
`agreements between Terraform and LUNA investors. These agreements generally entitled
`
`buyers to acquire LUNA at a discount to market prices. By selling at a discount to market prices,
`
`Defendants incentivized buyers to seek to sell their LUNA into public markets in order to realize
`
`a profit. Moreover, for some buyers who purchased LUNA prior to the public launch of the
`
`token, Defendants provided in some of the agreements for a gradated token distribution schedule
`
`that would control for the flow of LUNA tokens being sold into the market, such that early
`
`investors would receive their LUNA continuously over a period of 12-18 months. These
`
`provisions controlled the release of LUNA over a longer period of time in smaller quantities, to
`
`control for potential negative effects on LUNA’s price that could occur with large distributions
`
`of LUNA into the market. These provisions reflected the expectations of both Defendants and
`
`investors that that these LUNA investors would seek to sell their LUNA into public markets for a
`
`profit and sought to protect LUNA’s trading price by limiting amounts that could be resold
`
`during any given time period.
`
`                                                            
`3 Another Terraform employee agreed in an internal communication: “Luna receives value from
`Terra [stablecoin] as Terra [stablecoin] is transacted. In a way, investing in Luna is a bet that
`Terra’s economy will grow larger over time. Investors buy