Cress v. Nexo Financial LLC

Background

This discovery order addressed a dispute about John Cress’s interrogatory 3, which requested eight categories of information concerning “each sale of NEXO,” including the date and time, quantity, price, location of authorization, order number, exchange, known counterparty, and related contract.

The principal issue was whether Cress could obtain that transaction-level information for all Nexo Token sales worldwide or only for sales in the United States. Cress argued that global sales were relevant to Nexo’s federal-preemption defense and to whether the Nexo Token was a security under the Howey test. Nexo argued that only domestic sales counted for the relevant federal securities-law analysis.

Court’s Analysis

The court explained that federal law generally prohibits the sale of unregistered securities but provides exemptions, including Rule 506(c) for certain private offerings. The court also discussed the National Securities Markets Improvement Act, which can preempt state registration requirements for a “covered security.” Cress’s third claim alleged that Nexo sold the Nexo Token as an unregistered security in violation of California Corporations Code sections 25110 and 25503.

The court concluded that the word “all” in Rule 506(c) refers to purchasers in the United States for purposes of that exemption. It reasoned that sales outside the United States do not require the exemption because Section 5 of the Securities Act does not apply to those sales in the first place. The court noted, however, that global conduct could still provide evidence about Nexo’s offering in the United States. It also said evidence about the token could be relevant to the Howey inquiry regardless of where sales occurred.

But discovery under Federal Rule of Civil Procedure 26(b)(1) must be proportional to the needs of the case. The court found it difficult to see how detailed information about every foreign transaction—such as each sale’s price, quantity, order number, and time—would be relevant to federal preemption or the Howey test. Information about foreign counterparties might provide indirect or duplicative evidence of whether Nexo sold tokens to accredited investors, but the court concluded that U.S. sales should be sufficient for that question. The court was also skeptical that transaction-level data for every sale worldwide would substantially contribute to the Howey analysis.

Disposition

The court denied Cress’s motion to compel evidence of non-U.S. sales in response to interrogatory 3. The order stated that sweeping discovery aimed at determining whether sales were foreign was not justified by speculation. The order was signed by Thomas S. Hixson, United States Magistrate Judge.