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1/ 🚨 NEW LAW ALERT. A federal court in California just ruled against the SEC in an ICO case, explaining what a plaintiff will now have to prove for an ICO to be a security. If you care about whether ICOs create securities, read on. If not whatever im not the boss of you
2/ OK here’s what happened. The SEC brought an enforcement action against a company called Blockvest, alleging that Blockvest’s ICO was a securities offering.
3/ SEC asked the court for a preliminary injunction (an order freezing Blockvest’s assets, among other things) so it called a hearing on the evidence. Courts don’t just give away injunctions for free yaknow.
5/ Ultimately, the Court found that SEC couldn’t prove the ICO satisfied the Howey test and so SEC lost the motion. Honestly, the loss doesn’t really matter much. As the plaintiff, you’ve got to be aggressive and try for one. A smart play by the feds here I think.
6/ No, the important part is *how* the court denied the motion: Its decision was so thorough that it laid down a pretty complete roadmap on an overlooked prong of the Howey Test for ICO plaintiffs.
7/ Specifically, the first prong: 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.
8/ According to the court, in the ICO context there must be a “risk of financial loss”. This supports the proposition that something like an airdrop, by itself, cannot be a securities offering, even if the airdropped tokens are pre-functional. Admittedly rare today but possible!
9/ I admit this is one place where the court handed out a smackdown. SEC tried to claim that a mere “offer” is enough to violate the securities laws. Again, tough to blame SEC here. Gotta be aggressive. But the Court went out of its way to specifically reject that argument.
10/ The court found that the Plaintiff must first prove that the thing being offered is independently a security. Just offering a token isn’t enough.
11/ Just airdropping it isn’t enough.
12/ Dude I saw some shady twitter lawyer talking about this a little while ago I think
13/ Anyway, another important point: The assets committed must be committed *to the enterprise*. So, just buying the coins on a secondary market – even if they’re prefunctional – might not by itself result in a securities offering. Potentially powerful stuff.
14/ Finally, and this is oddly specific: The plaintiff must prove that the investor was actually *offered* the security. In this case, that the investor actually saw the website/whitepaper/telegram.
15/ This means the plaintiff must prove something called “reliance” – reliance on economic inducement, promotional materials etc. Here there was a tough factual dispute over just what the investors saw before they clicked “buy”, and the court wouldn’t cut the plaintiff any slack.
16/ Honestly, it feels a bit like the court just didn't like this case. The SEC showed the judge paper checks from the investors that literally had "blockvest" written on them in the memo field! Still, no love for the plaintiff.
17/ In any event, lots of commentators have taken the position that these cases are all layups. That everyone who sells in an ICO is going to jail. I think that’s intellectually lazy.
18/ I think this decision is evidence that these cases are factually nuanced, legally complex, and quite far from layups. Here's the decision if you want to read it drive.google.com/file/d/1SODrco…
19/ As my colleagues in twitter law have stated, SEC pretty much got what it wanted with regard to Blockvest. No bloody noses here. The precedent, though, is lasting, and definitely raises the bar for any plaintiff - public or private - seeking to sue ICO issuers.
20/ It's going to be more complex, I think, than any of us realized. And a lot gets lost in the world of ICOs, like remembering.
21/ ...to tweet 21 at a time.
Epilogue/ SEC didn't lose this case - just this one motion. ICOs can still result in securities. Your favorite token is probs still garbage. SEC still gonna wreck shop. Everything is a chemical. GMOs are safe. Vaccines cause adults.
The saga continues!
