Judge Refutes SEC’s Claim on Blockvest ICO Token Being a Security, Will Go to Trial
The crypto world received a surprising win from the U.S. justice system today. Earlier this week, a California judge slapped down an SEC attempt to classify an ICO token as a security.
U.S. District Judge Gonzalo Curiel of the Southern District of California declared yesterday that the Securities and Exchange Commission (SEC) has failed to provide adequate proof that the Blockvest ICO tokens should be considered securities.
For that reason, Judge Curiel has turned back a request from the SEC for a preliminary injunction against the backers of the Blockvest ICO and its BLV tokens.
It’s the first federal decision finding that the SEC hasn’t shown a digital asset offered in an ICO is a security. This is a big win for the crypto community.
As reported by CCN.com, the SEC uses three crucial metrics to determine whether or not a token is a security. These metrics date back to the 1946 SEC v. Howey Co. case. That case led to a landmark decision that governs the SEC’s enforcement of securities laws to this day.
The SEC claimed that the Blockvest ICO involved the illegal sale of securities in the form of tokens, and that the tokens failed to pass the Howey Test. Judge Curiel disagreed with the evidence presented by the SEC and was not satisfied with the SEC’s arguments.
The judge took particular issue with one specific requirement: in order to prove a token is a security, the SEC needs to prove that the tokens were sold to investors with the promise of expected profits. Judge Curiel was reportedly not convinced that investors had expected to make a profit on the purchase of Blockvest ICO tokens. Instead, Judge Curiel was convinced that the tokens were simply used to test the platform – not as a genuine investment.
The Blockvest ICO Used a Fake SEC Logo to Feign Regulatory Approval
Blockvest, for its part, appears to be far from innocent in this case: Blockvest was one of the shadier ICOs of the last year.
Part of the problem was that Blockvest appeared to create a fake SEC logo to feign approval.
Blockvest created a logo for a fake organization called the Blockchain Exchange Commission, apparently for the sole purpose of convincing investors that it was a regulated entity.
Blockvest allegedly created the Blockchain Exchange Commission (complete with an official-looking “BEC” symbol) because they wanted to convince investors that Blockvest’s ICO had been approved by a legitimate regulator. The BEC symbol looked suspiciously like the SEC’s symbol.
The Blockvest ICO Attracted Just 32 Investors
Ultimately, the Blockvest ICO failed to generate a splash in the crypto community – despite the best efforts of the Blockvest team.
The project received less than $10,000 in total investment from just 32 investors.
The Judge Believes Blockvest Tokens Pass the Howey Test
The Howey Test refers to the 1946 decision in the case between the SEC and the Howey Co. The test states that something can be considered a security if it has certain properties associated with a security.
Judge Curiel clearly believes that the Blockvest tokens pass the Howey Test. Therefore, they should not be considered securities.
Here’s how CCN.com summed up the issue:
“According to the judge, the SEC was unable to prove what promotional materials that investors – who numbered only 32 and whose total investment was under $10,000 – had responded to. While the SEC was able to demonstrate that investors were purchasing coins due to evidence shown on checks cashed, the judge did not feel this satisfied the evidence requirements in the Howey Test.”
Part of the reason the judge slapped down the SEC’s request was because of intelligent defending by the Blockvest team.
Blockvest Gave a “Brilliant Defense”
Blockvest’s defense has been described as “brilliant”. Blockvest claims its tokens were only used for testing of the exchange – nothing more.
The defense’s claim rests on the idea that most investors were actually well-known friends of defendant and Blockvest ICO creator Reginald Buddy Ringgold III.
Blockvest also faced scrutiny for claiming to have raised $2.5 million during the ICO. Blockvest, however, defended that claim by stating that the $2.5 million figure was “overly optimistic” and relied on a single investor. That deal later fell through.
The judge ultimately agreed with Blockvest’s defense. Blockvest’s BLV tokens should not be considered securities because the way they were marketed and sold did not meet the standard of a security sale. Thus, BLV tokens cannot be declared as securities at this time.
Here’s how the judge summed up his decision, as reported by Law.com:
“Based on the above, the Court DENIES Plaintiff’s motion for preliminary injunction. The Court also DENIES Defendants’ ex parte motion for evidentiary hearing and leave of court to file supplemental declarations. (Dkt. No. 30.) The Court also STRIKES Plaintiff’s Supplemental Declaration of David Brown and Defendants’ Opposition and Response. (Dkt. Nos. 39, 40.)”
After the decision was announced, Blockvest’s assets were unfrozen. However, the battle between Blockvest and the SEC is far from over.
Blockvest Isn’t Off the Hook and Could Face Penalties for Using the SEC’s Logo
The judge has struck down the SEC’s claim that Blockvest tokens should be considered securities. The judge feels that the SEC has insufficiently proven previous wrongdoing on the part of Blockvest, which means there should be no reason for the injunction.
However, that doesn’t mean Blockvest has escaped without penalty.
The biggest problem with Blockvest could be in the use of the SEC logo. As mentioned above, Blockvest fabricated an organization called the Blockchain Exchange Commission (BEC). The logo for that organization looked identical to the logo of the SEC. The fake BEC logo was displayed on the Blockvest ICO website, indicating to users that the Blockvest ICO had received official approval from the SEC.
The SEC, as you can imagine, does not take kindly to people abusing its logo, and Blockvest could face further penalties.
Conclusion: This is Good News for Future ICOs Seeking to Avoid Repercussions
The Blockvest ICO was one of the sleaziest ICOs in the crypto space. The creators of the ICO went so far as to create a symbol that looked like the SEC logo. Despite the low-quality ICO, the SEC was still unable to prove that Blockvest’s tokens could be considered securities.
This case is a big deal: it’s the first federal decision on whether the SEC can regulate digital assets from ICOs as securities. It remains to be seen what impact this will have on other ICO cases moving forward.