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J Scott Colesanti (Left) and Savannah Aronson (Right)

The art of oversighting cryptocurrency offerings remains a primer on federalism, as the Securities and Exchange Commission and the states have evidenced varying (if not conflicting) regulatory approaches. This article summarizes the dominant approaches of the moment while noting that polemic solutions rewarding either government registration or discipline form the most discernible guidance for the immediate future.

Technology Grounded in Orange Groves

Since 2013, the SEC has reined in crypto deals inviting investors under the Howey test of 1946. Under that hallowed standard, an issuance of digital assets (e.g., coins) can bring the issuing entity within the securities laws where the transaction satisfies a multi-part test. That test, long dignified in precedent, seeks investments in a common enterprise with the expectation of profits from the efforts of others. Defendants in such “Section 5” disciplinary cases can range from entities raising capital through the offering of digital currency to Ponzi schemers, to Bitcoin miners promising future fortune and “exchanges” serving as novel market centers. Accordingly, administrative actions/civil lawsuits such as ZenMiner (2015), Munchee (2017), and PlexCorps (2017) have garnered public attention and halted issuer offerings seen as unregistered sales of securities.

Likewise, this year has revealed disciplinary cases faulting issuers for not registering ersatz digital securities. In March, the SEC issued a complaint in Texas against three individuals, for fraud in connection with the offer, purchase or sale of securities after soliciting investors for “Meta1,” an unincorporated entity, by offering coins. It was alleged that over two years the defendants raised at least $4 million from over 150 investors. The defendants allegedly made false claims that the coins were digital coins backed by $1 billion in art and $2 billion in gold.

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