A litigation consultancy firm called Cornerstone Research recently put out a report, regarding the current lawsuits involving securities in the United States. Even though there has been plenty of bad publicity in the press lately, the research found that cryptocurrency ICOs only contribute to a small fraction of the cases. In fact, out of the 750 securities lawsuits that were initiated in the last two years. only 12 of them involved ICO projects.
These last two years have resulted in the most lawsuits for securities since 1995. However, in the report, the firm also found that there have been less and less lawsuits lately from American countries, though Asian and Indian countries were experienced twice the average of the last decade. Of the twelve ICO-related lawsuits, five of them were filed in 2017, and the other seven were filed this year.
Securities are considered financial assets, based on the value of the shares of the company. Every country has this classification defined in a different way, but the general consensus is that a security is a verified proof of ownership that has inherent value for trading.
Recently, the United States has been in a state of conflict concerning if tokens sold in an ICO can be considered securities. If it is considered a security, then the platform has to register with the SEC to legally run their business. The main regulator in all of this turmoil has been the Securities and Exchange Commission, who has been rather strict with ICOs in the country.
A recent example of this austerity was in December 2017, when the SEC went after Munchee, because they considered their tokens to be securities, even though Bitcoin is not. The reason that they got into trouble with the SEC is was due to a guarantee on their website that any token purchase would automatically receive a return. However, since the company complied with the requirements to shut down their efforts, the SEC did not charge them with any wrongdoing.
Another example is in the case of Dominic Lacroix and Sabrina Paradis-Royer. This twosome started an ICO for their project, PlexCoin, which resulted in $15 million in raised funds, after promising a 1,354% profit within a month of participation on their platform. The SEC ultimately brought down criminal charges on the couple in April 2017.
In a more recent case, five separate cryptocurrency companies had to stop their business functions in March 2018. The local securities authority of Massachusetts issued the command to halt their progress after deeming their tokens “securities” rather than utility tokens.
Even the biggest companies have had their run-ins, including Ripple, who has a market cap of $18.3 billion at the moment. They are in the middle of two lawsuits right now, one of which is suing the company for the “conditional” value. The lawsuit was filed by Ryan Coffey, who was upset by his $551 loss upon selling his XRP tokens. The documents say that XRP tokens “have all the traditional hallmarks of a security,” though the actual profit depended on changes in management decisions from Ripple.
During a hearing at the Senate in February, the SEC chairman, Jay Clayton, stated that every ICO should be automatically considered securities, which resulted in the sending of multiple subpoenas. However, it seems that the Senate is starting to lean towards a more realistic approach to ICOs. In June, the SEC specifically said that Ethereum will not be considered a security, showing that these authorities may start looking at companies as individual cases instead of making rules for the whole industry.
Cornerstone Research is based in San Francisco, though they have other offices throughout the United States and the United Kingdom.