1. Core Legal Theories Used in the USA

(A) Securities Fraud (Primary Theory)

Most rug pulls are prosecuted as violations of:

• Securities Act of 1933
• Securities Exchange Act of 1934
• Rule 10b-5 (anti-fraud rule)

Legal test:

Under the Howey Test (investment contract test), tokens may be securities if:

1. Investment of money
2. In a common enterprise
3. With expectation of profit
4. From efforts of others

If satisfied → rug pull becomes securities fraud.

(B) Commodities Fraud (CFTC jurisdiction)

Under:

• Commodity Exchange Act

The CFTC treats many cryptocurrencies as commodities, enabling enforcement against:

• manipulation
• fraud
• deceptive schemes

(C) Wire Fraud (Very Common in Rug Pulls)

Under:

• 18 U.S.C. § 1343

Requires:

• scheme to defraud
• interstate electronic communications

(D) Money Laundering (AML violations)

Under:

• Bank Secrecy Act

Used when developers:

• route stolen funds through mixers
• conceal proceeds

2. Key Case Laws on Crypto Fraud / Rug Pull–Like Liability

1. SEC v. Telegram Group Inc. (2020)

• Court: S.D.N.Y.
• Held that sale of GRAM tokens was an unregistered securities offering
• Emphasized economic reality over labeling

Relevance to rug pulls:
If tokens are sold to fund development but later dumped or withdrawn, courts may treat them as securities fraud.

2. SEC v. Kik Interactive Inc. (2020)

• Court: S.D.N.Y.
• Held that Kik’s Kin token sale violated securities laws
• Found expectation of profit from issuer efforts

Relevance:
Many rug pulls involve “marketing promises + token appreciation,” satisfying Howey.

3. SEC v. LBRY, Inc. (2022)

• Court ruled LBRY Credits were securities
• No requirement of formal contract; marketing mattered heavily

Relevance:
Even decentralized token ecosystems can create liability if developers control price expectations.

4. Commodity Futures Trading Commission v. McDonnell (2018)

• Court held virtual currencies are commodities under CEA
• Allowed CFTC fraud enforcement over crypto schemes

Relevance:
Rug pulls involving liquidity pools can fall under commodities fraud even without SEC classification.

5. SEC v. Terraform Labs & Do Kwon (2023)

• Alleged massive crypto fraud involving algorithmic stablecoin collapse
• Court accepted that crypto assets can be securities under Howey

Relevance:
A “liquidity drain” collapse engineered by developers resembles rug-pull mechanics legally.

6. United States v. Chastain (2022)

• First NFT insider trading case
• Defendant convicted under wire fraud statutes

Relevance:
Confirms that crypto-based manipulation schemes are prosecutable as traditional fraud.

7. United States v. Storm (Tornado Cash developer case, 2023 indictment context)

• Charges included money laundering facilitation
• Focus on smart contract-based financial tools

Relevance:
Shows liability may extend to code creators enabling laundering of rug pull proceeds.

3. How Courts Analyze Rug Pull Liability

(A) Control of Liquidity Pool

If developers:

• retain admin keys
• can remove liquidity
  → strong evidence of fraud intent

(B) Misrepresentation

Examples:

• fake audits
• false “locked liquidity” claims
• misleading whitepapers

These trigger:

• securities fraud
• wire fraud

(C) Investor Expectation

If investors believe:

• token will be listed
• price will rise due to developer effort

→ satisfies Howey investment expectation prong

(D) On-chain transparency does NOT eliminate liability

Courts consistently hold:

• “blockchain visibility ≠ legal consent to fraud”

4. Civil Liability Exposure

Victims can sue under:

• Rule 10b-5 private action
• State Blue Sky laws
• Common law fraud
• Unjust enrichment

Possible remedies:

• restitution
• disgorgement
• injunctions

5. Criminal Liability Exposure

Rug pull developers may face:

• securities fraud (20+ years)
• wire fraud (20+ years)
• conspiracy charges
• money laundering (10–20+ years)

6. Key Legal Reality (Important)

Even though “rug pull” is a crypto-native term:

U.S. courts do NOT treat it as a new category of law.

Instead:

• It is prosecuted using existing fraud + securities + commodities frameworks
• Liability depends on control, deception, and investor reliance, not blockchain mechanics

7. Summary

Liquidity pool rug pulls in the U.S. are typically illegal when they involve:

• deceptive token promotion
• investor reliance on developer efforts
• withdrawal of liquidity under misleading conditions

They are most commonly prosecuted as:

• securities fraud (SEC)
• commodities fraud (CFTC)
• wire fraud (DOJ)