Bankrupt crypto company Terraform Labs is set to face a Chapter 11 bankruptcy reorganization hearing on September 19. The outcome of the hearing will play a major role in the company’s future. Terraform has been struggling with legal battles and financial difficulties since the dramatic collapse of the Terra ecosystem in 2022.

The court’s decision will determine whether the company can restructure and emerge from bankruptcy or liquidate its remaining assets and cease operations altogether.

Terraform Labs Reorganization

Terraform Labs’ fortunes took a dramatic turn when its TerraUSD (UST) stablecoin lost its peg to the US dollar in May 2022, triggering a catastrophic crash that wiped out billions of dollars in value. This incident not only resulted in a loss of investor confidence, but also faced intense scrutiny from regulators, culminating in a lawsuit filed by the U.S. Securities and Exchange Commission (SEC) in February 2023.

In January 2024, Terraform Labs filed for Chapter 11 bankruptcy in the state of Delaware, marking the beginning of a long and complicated legal process. The company’s co-founder and former CEO Do Kwon was at the center of this controversy and faced legal action.

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In a joint settlement with the SEC in July 2024, Terraform and Kwon agreed to pay a staggering $4.5 billion in penalties, restitution, and interest. The agreement effectively banned Kwon and Terraform from the crypto industry.

Terraform is Winding Down Operations

As part of the bankruptcy process, Terraform Labs is currently planning to sell off significant assets as it winds down its operations. The company is actively exploring the sale of key assets such as portfolio tracking platform Pulsar Finance, crypto wallet platform Station, codeless decentralized autonomous organization management platform Enterprise, and smart contract automation protocol Warp. These businesses, once considered valuable assets, are being sold as part of Terraform’s efforts to raise funds to meet its obligations under the SEC settlement.

The $4.5 billion settlement with the SEC stands out as one of the largest penalties in the history of the crypto industry, highlighting the seriousness of the company’s violations and the far-reaching consequences of its collapse. Other steps in the restructuring process included the court-mandated burning of Terra (LUNA) tokens and the reopening of the Shuttle Bridge.

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The SEC‘s proposal includes a demand for about $4.7 billion in disgorgement and prejudgment interest, along with civil penalties of $420 million for Terraform and $100 million for Kwon. However, the lawyers representing the defendants believe that these figures are excessively high.

In a court filing posted late last week, Terraform and Kwon’s legal team argued for a significantly lower penalty. They stated that the court should not grant injunctive relief or disgorgement and should, at most, impose a $1 million civil penalty against Terraform Labs (TFL).

The SEC charged Terraform and Kwon in February 2023 over issues related to the algorithmic stablecoin Terra USD (UST), which experienced a dramatic collapse in value a year earlier. Terra USD, linked to the governance token luna, aimed to maintain price stability through algorithmic market incentives. However, in May 2022, UST crashed, resulting in losses exceeding $50 billion.

A jury recently found both Terraform and Kwon liable for civil fraud, based on allegations that they misled investors. Key issues examined by the jury included claims by the SEC that Terraform and Kwon violated federal securities laws through fraudulent activities related to the trading of Terraform securities. Additionally, Judge Jed Rakoff had previously granted summary judgment to the SEC, supporting claims that Terraform and Kwon offered and sold unregistered securities.

Following the verdict, a spokesperson for Terraform stated that the company is carefully evaluating its options and considering its next steps in response to the legal proceedings.

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