Crypto enthusiasts were cheering what many reports were calling a “Monumental” ruling by a Federal Court. The court ruled in favor of Blockvest, a crypto Initial Coin Offering (ICO) that was still in its initial testing phase, well before any real investing had ever taken place.
The U.S. Securities and Exchange Commission (SEC) had shuttered the startup in its tracks with a Temporary Restraining Order (TRO), leading one law firm to opine that:
The SEC won the war but lost the preliminary-injunction battle by nipping this ICO in the bud.
Going forward, however, the SEC and investors will have a more difficult time proving that an ICO token is a security and, therefore, subject to more stringent registration and disclosure rules.
Jay Clayton, the Chairman of the SEC, is caught between a rock and a hard place. Fraud is pervasive in the ICO space, ranging anywhere from 50% to 90%, depending on how you interpret data for the past two years. He is committed to protecting investors from fraud and scams in the investment marketplace. Investors have already been hoodwinked out of billions of dollars from ICOs that have failed or have been outright fraud. The SEC’s only recourse, however, is to use arcane and out of date securities law to tackle a modern day digital instrument that skirts existing regulations with impunity.
During a Congressional Hearing in February, Clayton was quoted as saying that:
I believe every ICO I’ve seen is a security.” He and his staff have subsequently exempted both Bitcoin and Ether from the mix, but the agency has made it known that all other coin systems are suspect. Their recent 2018 Annual Report touts that, “The SEC brought up to 20 stand alone enforcement actions related to ICOs and digital assets, and charged individuals in more than 70 percent of these cases… Additional ICO enforcement actions are likely in FY 2019.
The Blockvest ICO may not have been the best “target” to attack with a TRO and then ask for an injunction. According to one report: “Blockvest was preparing for an ICO of “BLV” tokens. Its website touted the endeavor as the “first licensed and regulated tokenized cryptocurrency exchange and index fund based in the United States,” and showed pictures of the seals of the SEC, CFTC, NFA and others. It also claimed to be regulated by the fictitious “BEC” (Blockchain Exchange Commission), which not coincidentally appeared to share the same Washington address as the SEC.”
With such misrepresentations, how did the SEC botch this one?
The court made its ruling based on the facts and circumstances. Blockvest was in the initial testing phase. In a private sale, 32 BLV tokens were sold to “testers” known to the promoter and who had “no expectations of any real profits.” By closing the operation with its TRO, the SEC could not “show a likelihood of continuing harm.” Based on these conditions, the Federal Court had no option but to decline to enter a preliminary injunction. In this case, little “David” may have only wounded mighty “Goliath”.
Marco Santori, the president and chief legal officer at Blockchain, had this to say about the proceedings:
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.