Court Holds SEC Has Not Proven that a Pre-ICO Cryptocurrency Is a "Security" | Practical Law

Court Holds SEC Has Not Proven that a Pre-ICO Cryptocurrency Is a "Security" | Practical Law

The US District Court for the Southern District of California denied the SEC's motion for a preliminary injunction against a cryptocurrency company, ruling that the SEC did not prove that the company's pre-ICO cryptocurrency is a "security" as defined under US securities laws.

Court Holds SEC Has Not Proven that a Pre-ICO Cryptocurrency Is a "Security"

Practical Law Legal Update w-017-8987 (Approx. 5 pages)

Court Holds SEC Has Not Proven that a Pre-ICO Cryptocurrency Is a "Security"

by Practical Law Corporate & Securities
Published on 04 Dec 2018USA (National/Federal)
The US District Court for the Southern District of California denied the SEC's motion for a preliminary injunction against a cryptocurrency company, ruling that the SEC did not prove that the company's pre-ICO cryptocurrency is a "security" as defined under US securities laws.
Update: On February 14, 2019, the US District Court for the Southern District of California reversed its November 2018 order and issued a preliminary injunction against Blockvest, LLC and its founder, Buddy Ringgold. After a more expansive review of the company's promotional and communications materials surrounding the ICO, the court found a prima facie case that Blockvest made numerous fraudulent misrepresentations. The court further found that the BLV token was a security falling within the definition of an investment contract under the Howey test because it was (1) an investment of money (2) in a common enterprise (3) with an expectation of profits produced by the efforts of others. For more information on the Howey test, see Practice Note, Security Defined.
On November 27, 2018, the US District Court for the Southern District of California denied the SEC's motion for a preliminary injunction against a cryptocurrency company, ruling that the SEC did not prove that the company's pre-ICO cryptocurrency is a "security" as defined under US securities laws.
The SEC alleged that the cryptocurrency company, Blockvest, LLC, and its founder, Reginald Buddy Ringgold, III, have falsely claimed that their initial coin offering (ICO) has been registered and approved by the SEC and other regulators. According to the SEC's complaint, the offering consisted of pre-sales in March 2018 of digital assets called BLVs, which were being sold in several stages:
  • Private sale (with a 50% bonus) that ran through April 30, 2018.
  • "Pre-sale" (with a 20% bonus) from July 1, 2018 through October 6, 2018.
  • ICO launch of $100 million on December 1, 2018.
Blockvest had raised $2.5 million in seven days, according to the complaint, and the SEC moved for a preliminary injunction to freeze the company's assets and prevent Ringgold from buying or selling securities and other digital currency while the case was pending. The court noted that the SEC must show:
  • A prima facie case of previous violations of federal securities laws.
  • A reasonable likelihood that the wrong will be repeated.
As for the first requirement, the court held that, at this stage, without full discovery and with disputed issues of material facts as to what 32 test investors relied on before they purchased the test BLV tokens, it could not make a determination whether the BLV tokens purchased were "securities" as defined under the securities laws. As for the second requirement, the court held that, because Ringgold asserted that he will not pursue the ICO and will provide SEC's counsel with 30 days' notice in the event they decide to proceed, and the SEC has agreed to stop any pursuit of the ICO, the SEC has not demonstrated a reasonable likelihood that the wrong will be repeated.
For more information on recent cryptocurrency developments, see Legal Updates: