US v. Zaslavskiy: Court Finds that US Securities Laws May Apply to ICOs | Practical Law

US v. Zaslavskiy: Court Finds that US Securities Laws May Apply to ICOs | Practical Law

The US District Court for the Eastern District of New York (EDNY), in US v. Zaslavskiy, found that two virtual currency investment schemes, REcoin and Diamond, and their related initial coin offerings (ICOs) may be subject to US securities laws.

US v. Zaslavskiy: Court Finds that US Securities Laws May Apply to ICOs

Practical Law Legal Update w-016-7128 (Approx. 4 pages)

US v. Zaslavskiy: Court Finds that US Securities Laws May Apply to ICOs

by Practical Law Finance
Published on 20 Sep 2018 • USA (National/Federal)
The US District Court for the Eastern District of New York (EDNY), in US v. Zaslavskiy, found that two virtual currency investment schemes, REcoin and Diamond, and their related initial coin offerings (ICOs) may be subject to US securities laws.
On September 11, 2018, the US District Court for the Eastern District of New York (EDNY), in US v. Zaslavskiy, found that two virtual currency or cryptocurrency investment schemes, REcoin and Diamond, and their related initial coin offerings (ICOs), may be subject to US securities laws (US v. Zaslavskiy, (EDNY Sept. 11, 2018)).
According to Reuters, this is one of the first instances in which a court has ruled that securities laws may be used to prosecute fraud cases over ICOs.
The defendant, Maksim Zaslavskiy, founded the cryptocurrencies REcoin and Diamond in 2017. REcoin and Diamond were advertised as blockchain virtual currencies backed by real estate and diamonds, respectively, with promises of high returns. However, no real estate or diamonds were found to have backed the virtual currencies.
The defendant was indicted on three counts of alleged securities fraud in connection with REcoin and Diamond. The defendant moved to dismiss the indictment on the grounds that the cryptocurrencies were not securities and thus not subject to federal securities laws.
The court denied the defendant's motion to dismiss, finding that the question of whether the alleged virtual currency schemes are securities and thus subject to securities laws should proceed to trial.
The court found that:
  • The allegations in the indictment, if proven, would permit a reasonable jury to conclude that the defendant promoted investment contracts, or securities, under the Howey test (see SEC v. W.J. Howey Co., 328 US 293, at 298-9 (1946)).
  • The Exchange Act and SEC Rule 10b-5, under which the defendant was charged, were not unconstitutionally vague as applied to the case.
  • The indictment was constitutionally sound.
The court also noted in its reasoning that the SEC has stated that cryptocurrencies can be considered securities (see Legal Updates, SEC and CFTC Issue Statements on Cryptocurrencies and Initial Coin Offerings and SEC Chairman Warns Legal Advisors on ICOs).
The court emphasized that the question of whether the virtual currencies are in fact securities is a question of fact that would be decided at trial.