ICOs have come under a great deal of scrutiny by the SEC. But they're not getting it all their own way.
Image: Bitcoin Isle
One for ICOs
A federal court in California has turned down a request from the SEC for a preliminary injunction against the backers of the Blockvest ICO. In doing so it has brought greater clarity on what grounds the SEC could prove an ICO to be a security.
The SEC alleged that Blockvest’s ICO was a securities offering. They requested a preliminary injunction—an order freezing Blockvest’s assets, among other things—so the Court called a hearing on the evidence.
In essence, the Court found that SEC couldn’t prove the ICO satisfied the Howey test.
The Howie Test, image: RealEstateCE
Just airdropping isn’t enough
The Court was extremely thorough in laying down an almost complete roadmap on an overlooked prong of the Howey Test for ICO plaintiffs: It must be an Investment of Money.
For there to be a security, the court required that the investor must “commit his assets to the enterprise” so as to risk “financial loss”. These requirements are independently important.
According to the court, in the ICO context, there must be a “risk of financial loss”. So something like an airdrop, by itself, cannot be a securities offering, even if the airdropped tokens are pre-functional.
The SEC tried to claim that a mere “offer” is enough to violate the securities laws. But the Court went out of its way to specifically reject that argument. It found that the plaintiff must first prove that the thing being offered is independently a security. Just offering a token isn’t enough.
In another important part of the ruling, the court said the assets committed must be committed to the enterprise. Just buying the coins on a secondary market—even if they’re pre-functional—might not by itself result in a securities offering.
In a very specific ruling, the Court said the plaintiff must prove that the investor was actually offered the security. In Blockvest's case, the investor actually saw the website/whitepaper/telegram.
This means the plaintiff must prove something called “reliance”—reliance on economic inducement, promotional materials, etc. The court took a tough stance on the factual dispute over just what the investors saw before they clicked “buy”.
As an example, the SEC showed the judge paper cheques from investors that literally had “blockvest” written on them in the memo field! The court could find no reliance on that.
Of course, it's not all cut and dried. These cases are factually nuanced and legally complex. You can read the decision here.
Nick Morgan—previously senior trial counsel at the SEC—said:
It is only through these sorts of decisions that we will learn the limits of the SEC’s jurisdiction. The SEC should not assume that the courts are going to skate over whether or not there is a security present.
This doesn't mean ICOs can't result in securities. It just means the bar has been raised for the SEC to prove its case. And that doesn't mean they won't continue with aggressive action.
References:
The Recorder: Judge to SEC: You Haven't Shown This ICO Is a Security Offering
BTC WIRES: U.S. SEC’s Request Regarding ICO Gets Turned Down By District Judge
CCN: Monumental: Federal Court Rules Case in Favor of Crypto ICO Against SEC
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