Judge to SEC: You Haven't Shown This ICO Is a Security Offering
U.S District Judge Gonzalo P. Curiel on Tuesday found that the SEC couldn't show that investors had bought into the Blockvest ICO with an expectation of making a profit from the efforts of others.
November 27, 2018 at 06:51 PM
4 minute read
In what appears to be the first federal decision finding that the U.S. Securities and Exchange Commission hasn't shown a digital asset offered in an initial coin offering is a security, a judge in San Diego has turned back a request from the SEC for a preliminary injunction against the backers of the Blockvest ICO.
U.S District Judge Gonzalo Curiel of the Southern District of California, who previously granted the SEC's ex parte request for a temporary restraining order and froze the assets involved in the ICO, found Tuesday that the SEC couldn't show that investors bought into the Blockvest offering with the expectation of making a profit from the efforts as others—part of the three-part “Howey” test for the definition of a security under the the 1946 U.S. Supreme Court decision in SEC v. W.J. Howey Co.
SEC representatives didn't immediately respond to a request for comment on the decision. But former SEC lawyers now in private practice said that the case sends a message to the agency that courts are paying close attention to the question of whether digital tokens fit the legal definition of a security—even in cases where there are allegations that ICO investors are being defrauded.
“It is only through these sorts of decisions that we will learn the limits of the SEC's jurisdiction,” said Paul Hastings' Nick Morgan, who was previously senior trial counsel at the SEC. “The SEC should not assume that the courts are going to skate over whether or not there is a security present.”
In its complaint, the SEC alleged that Blockvest and its founder, Reginald Buddy Ringgold III falsely claimed its ICO was “licensed and regulated” by various agencies, including the SEC. The agency also claimed Ringgold promoted the ICO on the internet by saying it had gotten sign off from a fake agency called the “Blockchain Exchange Commission.” The SEC alleged Ringgold used a logo similar to the SEC seal and the same address as SEC headquarters for the faux agency.
But in defending against the SEC preliminary injunction request, Blockvest contended its initial offering involved just 32 testers who put a total of less than $10,000 worth of Bitcoin and Ethereum onto the Blockvest Exchange. Its BLV tokens, they claim, were only designed for testing the companies platform. Although the SEC had shown that some of the venture's backers had written “Blockvest” or “coins” on their checks to the company, Curiel found that the SEC couldn't show that the test investors expected to profit.
“Merely writing “Blockvest” or “coins” on their checks is not sufficient to demonstrate what promotional materials or economic inducements these purchasers were presented with prior to their investments,” Curiel wrote.
Stanley Morris of Santa Monica's Corrigan & Morris, who represents Blockvest and Ringgold, said it was obvious that the judge had studied the facts and the applicable precedent.
“It is an extraordinary challenge for defendants facing freeze orders and restraining orders obtained ex parte by the government,” Morris said. “They face a mountain of expedited discovery ordered by the court, with no money to pay professionals to respond.” Morris said his client's “met that challenge through aggressive defense and proactive presentations of evidence.”
“Relieved of the constraints of the TRO, our clients are now free to defend themselves through trial and look forward to being vindicated,” he said.
Fenwick & West's Mike Dicke, who was previously the top enforcement lawyer in the SEC's San Francisco regional office, said that the case demonstrated that question of whether or not an individual ICO is a security or not will depend on how its “offered and sold.”
“Is this digital asset a security? That's not the right question to ask,” he said. “I think that my biggest takeaway from the order is that the SEC failed to prove that the way it was 'offered and sold' meets the definition of a security.”
Read the decision below:
Clarification: An earlier version of this story was headlined “Judge to SEC: This ICO Isn't a Security Offering.” The headline and first sentence have been updated to reflect the fact that the judge found the SEC could not conclusively show that the underlying token was a “security” because of disputed factual issues.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllHueston Hennigan Secures Dismissal of SEC Action Against Ex-PwC Auditor in Mattel-Linked Case
How Dana Rao Built a 'Yes' Culture at Adobe and Why He Walked Away
Trending Stories
- 1Infant Formula Judge Sanctions Kirkland's Jim Hurst: 'Overtly Crossed the Lines'
- 2Election 2024: Nationwide Judicial Races and Ballot Measures to Watch
- 3Guarantees Are Back, Whether Law Firms Want to Talk About Them or Not
- 4How I Made Practice Group Chair: 'If You Love What You Do and Put the Time and Effort Into It, You Will Excel,' Says Lisa Saul of Forde & O'Meara
- 5Abbott, Mead Johnson Win Defense Verdict Over Preemie Infant Formula
- 6How Much Does the Frequency of Retirement Withdrawals Matter?
Who Got The Work
Michael G. Bongiorno, Andrew Scott Dulberg and Elizabeth E. Driscoll from Wilmer Cutler Pickering Hale and Dorr have stepped in to represent Symbotic Inc., an A.I.-enabled technology platform that focuses on increasing supply chain efficiency, and other defendants in a pending shareholder derivative lawsuit. The case, filed Oct. 2 in Massachusetts District Court by the Brown Law Firm on behalf of Stephen Austen, accuses certain officers and directors of misleading investors in regard to Symbotic's potential for margin growth by failing to disclose that the company was not equipped to timely deploy its systems or manage expenses through project delays. The case, assigned to U.S. District Judge Nathaniel M. Gorton, is 1:24-cv-12522, Austen v. Cohen et al.
Who Got The Work
Edmund Polubinski and Marie Killmond of Davis Polk & Wardwell have entered appearances for data platform software development company MongoDB and other defendants in a pending shareholder derivative lawsuit. The action, filed Oct. 7 in New York Southern District Court by the Brown Law Firm, accuses the company's directors and/or officers of falsely expressing confidence in the company’s restructuring of its sales incentive plan and downplaying the severity of decreases in its upfront commitments. The case is 1:24-cv-07594, Roy v. Ittycheria et al.
Who Got The Work
Amy O. Bruchs and Kurt F. Ellison of Michael Best & Friedrich have entered appearances for Epic Systems Corp. in a pending employment discrimination lawsuit. The suit was filed Sept. 7 in Wisconsin Western District Court by Levine Eisberner LLC and Siri & Glimstad on behalf of a project manager who claims that he was wrongfully terminated after applying for a religious exemption to the defendant's COVID-19 vaccine mandate. The case, assigned to U.S. Magistrate Judge Anita Marie Boor, is 3:24-cv-00630, Secker, Nathan v. Epic Systems Corporation.
Who Got The Work
David X. Sullivan, Thomas J. Finn and Gregory A. Hall from McCarter & English have entered appearances for Sunrun Installation Services in a pending civil rights lawsuit. The complaint was filed Sept. 4 in Connecticut District Court by attorney Robert M. Berke on behalf of former employee George Edward Steins, who was arrested and charged with employing an unregistered home improvement salesperson. The complaint alleges that had Sunrun informed the Connecticut Department of Consumer Protection that the plaintiff's employment had ended in 2017 and that he no longer held Sunrun's home improvement contractor license, he would not have been hit with charges, which were dismissed in May 2024. The case, assigned to U.S. District Judge Jeffrey A. Meyer, is 3:24-cv-01423, Steins v. Sunrun, Inc. et al.
Who Got The Work
Greenberg Traurig shareholder Joshua L. Raskin has entered an appearance for boohoo.com UK Ltd. in a pending patent infringement lawsuit. The suit, filed Sept. 3 in Texas Eastern District Court by Rozier Hardt McDonough on behalf of Alto Dynamics, asserts five patents related to an online shopping platform. The case, assigned to U.S. District Judge Rodney Gilstrap, is 2:24-cv-00719, Alto Dynamics, LLC v. boohoo.com UK Limited.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250