Federal Court Rules Case in Favor of Crypto ICO Against SEC

December 3, 2018 12:00 AM
Federal Court Rules Case in Favor of Crypto ICO Against SEC

Marco Santori, the president and chief legal officer at Blockchain, said:

“The SEC brought an enforcement action against a company called Blockvest, alleging that Blockvest’s ICO was a securities offering. 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.”

The SEC failed to justify that the ICO in question was actually a security and the court refused to acknowledge the token as a security solely based on the distribution method of the asset.

Precedent For the Market

The unexpected decision of the federal court is not necessarily a loss for the SEC nor a huge victory for the cryptocurrency sector. As SEC chairman Jay Clayton said, most ICOs that investors in the market talk about are mostly considered securities under existing U.S. regulations.

But, the outcome of the case established a precedent for the market and with some technicalities, some ICOs could potentially challenge the SEC in court and win a case if supported by sufficient evidence.

The SEC and investors in ICOs could also become more cautious in filing a lawsuit against an ICO project, as the court requires the plaintiff to explicitly describe the nature of the asset as a security, unaffected by the method in which the asset was introduced to the market.

“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,” Santori said.

The Blockchain executive, who operates the most widely utilized cryptocurrency wallet platform in the world, added that the federal court “went out of its way” to reject the argument from the SEC that the mere act of distributing an asset through an airdrop or a token sale is a security as it doubled down on its stance that a token offering in itself is not a security.

An important element of the case was the requirement of the court to the SEC to prove that an investor bought the token because the investor was offered the security directly by the issuer. For instance, if an investor in an ICO is to file a lawsuit against the project, the investor will need to prove, somehow, that the investor invested in the token sale directly by looking at the website, whitepaper, or some other information offered by the issuer.

More Complex to Sue an ICO

The recent federal court ruling created a more complex environment for both the SEC and investors in ICOs to challenge the issuer of a token and to claim that a token is a security based on U.S. regulations.

Santori added that the precedent established by the Blockvest case has raised the bar for any plaintiff seeking to sue ICO issuers:

“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. 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.”