Second Circuit Affirms Dismissal of Securities Claims Against Decentralized Trading Platform's Owners and Investors

On Feb. 26, 2025, the U.S. Court of Appeals for the Second Circuit affirmed in part and vacated in part a decision dismissing securities claims brought by plaintiffs who bought crypto assets on the Uniswap Protocol (the Protocol) alleging violations of Sections 12(a)(1) and 15 of the Securities Act, Section 29(b) of the Exchange Act and state law claims against Uniswap Labs, its CEO and certain of its investors.[1]  Plaintiffs alleged that defendants unlawfully promoted and sold crypto assets by creating and operating the Protocol, which facilitated their transactions in unregistered securities. 

In 2023, the U.S. District Court for the Southern District of New York granted defendants’ motions to dismiss, and on appeal the Second Circuit affirmed the dismissal of the Securities Act and Exchange Act claims but vacated and remanded for reconsideration of the state law claims. This decision may be the most prominent appellate decision embracing the legal distinctions between centralized and decentralized trading platforms under the federal securities laws, and it further confirms the limits of solicitation liability for alleged promoters of crypto transactions.

Background

Hayden Adams, Uniswap Lab’s CEO, created and released in 2018 the Protocol, the first and arguably premier decentralized system of smart contracts that functions through an automated market maker (AMM). As the district court held, the AMM facilitates transactions between buyers and sellers of digital assets without taking possession of the assets being exchanged. In short, transaction fees incentivize issuers and liquidity providers to offer crypto assets for sale on the Protocol, and autonomous code allows buyers to “swap” their crypto assets at a price automatically set by market supply and demand. Importantly, the Protocol operates on an independent, peer-to-peer basis on the Ethereum blockchain—users can connect their crypto “wallets” with the Protocol on the internet and provide inputs to the Protocol’s smart contracts, which are automatically executed without an intermediary. Adams and Uniswap Labs own the Protocol and manage it through a governance structure involving UNI, a token issued in September 2020. 

Plaintiffs brought the Risley action arising from losses in crypto assets purchased on the Protocol. Plaintiffs alleged that issuers who are not affiliated with defendants sold so-called “scam tokens” on the Protocol, and that defendants violated the securities laws by facilitating transactions in fraudulent assets by creating and releasing the code that underlies the AMM, and through their control of UNI tokens. Plaintiffs further allege that defendants promoted the Protocol, including by Adams’ tweets that the Protocol was “safe” to trade on and useful “for many people.”   

The Southern District of New York Grants Defendants’ Motions to Dismiss

In August 2023, the Southern District of New York granted defendants’ motion to dismiss the Risley complaint in its entirety.[2] First, the court dismissed the 29(b) claims and found that the Protocol and non-asset specific smart contracts that defendants created were not unlawful on their face and were “able to be carried out lawfully” as with transactions in non-securities, such as Bitcoin and ETH. In contrast, the court found that scam token issuers created unlawful contracts for transactions in unregistered securities, and therefore only they, and not defendants, could be liable for such conduct.

Second, the court dismissed the Section 12 claims under both of plaintiffs’ theories of liability. Under Pinter v. Dahl[3], liability under Section 12 may arise from either 1) passing title of an unregistered security to a buyer for value, or 2) if a defendant “successfully solicits the purchase of a security, motivated at least in part by a desire to serve its own financial interests or those of the securities owner.” The court rejected both theories. As to the first, the court found that defendants "may have drafted the contracts underlying the Protocol does not mean that they have title in the assets traded there” and similarly defendants could not control the Protocol such that they hold title to assets on it “simply because they hold [governance] tokens that can impact how the Protocol may function in the future.”  

As to the second theory, the court found that plaintiffs failed to support the conclusory theory that defendants sold tokens to plaintiffs and that there was no allegation that any alleged solicitation was successful. The court further found that Adams’ promotional statements about the Protocol are “too attenuated to state a claim” and that holding defendants liable would be akin to finding Nasdaq liable for tweeting that it was a safe place to trade.[4]

The court also dismissed without prejudice plaintiffs’ state blue sky law claims due to its dismissal of the federal claims and declined to exercise supplemental jurisdiction. Plaintiffs appealed and following full briefing the Second Circuit reached its judgment in February 2025.

The Second Circuit Affirms the Dismissal Of the Federal Securities Claims

The Second Circuit reviewed de novo and affirmed the dismissal of the federal claims.  First, it confirmed the trial court’s analysis that the “hosts of the protocol do not hold title to the tokens placed in the liquidity pool by third party users of the platform” and noted that the complaint acknowledges that “it is the token issuers and liquidity providers who retain title of their tokens” until sale.  Noting that Pinter excludes from liability “participants collateral to the offer or sale of securities,” the Second Circuit found that the Protocol and its creators are too peripheral to the transactions to be liable for them. The Second Circuit also agreed with the trial court’s analogy to Nasdaq and found that even if title passed through the Protocol momentarily defendants would not be liable because they are “only remotely related to the relevant aspects of the sales transactions.”      

The Second Circuit also affirmed the dismissal of the solicitation theory and found that defendants’ promotions of the Uniswap platform on social media do not render them statutory sellers. It found defendants’ conduct was “too attenuated from Plaintiffs’ purchase” to show that defendants “successfully solicited” the purchases motivated by a desire to serve their own financial interests. 

Similarly, the Second Circuit affirmed the dismissal of the 29(b) claims because the relevant smart contracts are “simply standardized computer codes that allow the Protocol to fill in the terms for individual trades between and controlled by its users.” The court found that the “transaction-specific terms of a token swap are not determined as a result of the conduct of Defendants” and agreed with the lower court that it “defies logic that a drafter of . . . computer code could be held liable under the Exchange Act for a third-party user’s misuse of the platform.” 

As to the state law claims, however, the Second Circuit disagreed with the lower court. It found, as some defendants had conceded, original diversity jurisdiction over the state law claims under the Class Action Fairness Act and vacated and remanded for reconsideration of only the state law claims.

Key Takeaways

Risley is perhaps the first and most enthusiastic appellate court decision embracing that decentralized peer-to-peer trading platforms are legally distinct under the federal securities laws compared to their centralized peers. The U.S. Securities and Exchange Commission under former-Chairman Gary Gensler proposed rules that include “communication protocols” within the definition of an exchange, which were intended to capture DeFi trading systems such as Uniswap.[5]  Gensler’s departure and Risley suggest that a truly decentralized exchange will be viewed differently under the law, and support the viability of this business model under current regulation.

Relatedly, Risley serves as the second appellate decision that recognizes that immutable smart contracts and self-executing code are not mere extensions of their creators. The Second Circuit’s conclusion in Risley that a coder cannot be liable under the Exchange Act for a third-party’s misuse of his code is in accord with the Fifth Circuit’s recent decision that the Tornado Cash protocol is not “property” subject to the U.S. Office of Foreign Asset Control’s sanctions jurisdiction.[6] Autonomous code does not fit easily into existing regulatory frameworks and Risley adds to the hope that overzealous regulators will not snuff out this technology.  

Risley also clarifies what exceeds a successful solicitation under Pinter and Section 12. Possibly because many 2021-stage digital asset issuers went bankrupt, shareholder plaintiffs have sought to extend solicitation liability to promoters that are not integral to the subject securities transactions. The Second Circuit’s affirmation that public statements attenuated from a transaction do not convert a remote third party into a statutory seller is welcome authority for promoter defendants who have been sued despite their distant relationship with fraudulent issuers.

If you have questions or would like more information on these issues please contact the authors. 

[1] Risley v. Univ. Navigation Inc., 23-1340-cv (2d Cir. Feb. 26, 2025) (Summary Order).

[2] Risley v. Univ. Navigation Inc., 690 F. Supp.3d 195 (S.D.N.Y. 2023).

[3] 486 U.S. 622, 632, 647 (1988).

[4] The court also dismissed Plaintiffs’ control person claims.

[5] See https://www.sec.gov/newsroom/press-releases/2023-77.

[6] Van Loon v. Dept of Treasury, Slip op. No. 23-50669 (5th Cir. Nov. 26, 2024).