Court Offers Guidance on Digital Tokens as Securities

The U.S. Securities and Exchange Commission (SEC) convinced a federal district court to reconsider whether a digital token sale consistutes a security offering, providing guidance on the application of securities law to cryptocurrency.

Though the U.S. District Court for the Southern District of California originally refused to enjoin a company’s cryptocurrency exchange because its tokens could not be considered “securities,” the SEC’s motion for reconsideration succesfully shifted the court’s focus from what or to whom the company offered its token, to how the company made its offer. The reversal marks the first of its kind in the cryptocurrency context and provides insight into how the SEC is likely to frame its enforcement efforts going forward.

SEC Fails to Establish Sale to Test Investors Violated Law

In SEC v. Blockvest, LLC, the SEC filed suit in the U.S. District Court for the Southern District of California to enjoin defendant Blockvest from offering and selling unregistered securities in the form of digital tokens. Prior to its Initial Coin Offering (ICO), Blockvest sold its tokens to 32 test investors, representing its platform as the “first licensed and regulated tokenized crypto currency exchange and index fund.” To promote the upcoming ICO, Blockvest published materials claiming its tokens would generate passive income and realize double-digit returns. According to the SEC’s complaint, the materials falsely stated that the SEC registered and approved the ICO, and further claimed a sham regulatory agency, the “Blockchain Exchange Commission,” licensed and regulated its tokens.