The Southern District of California has declined to issue a preliminary injunction against a cryptocurrency issuer following an emergency court order halting a planned initial coin offering (ICO) and freezing assets of the issuer and its founder. According to the court, the SEC did not establish that the digital tokens at issue qualified as "securities" under the Howey test and thus did not show a violation of the federal securities laws (SEC v. Blockvest, LLC, November 27, 2018, Curiel, G.).
Alleged scheme. In its complaint, the SEC alleged that cryptocurrency issuer Blockvest, LLC falsely claimed its ICO and its affiliates received regulatory approval from various agencies, including the SEC. The Commission also contended that Blockvest and its founder used the SEC seal without permission and falsely claimed that their crypto fund was "licensed and regulated." The complaint also alleged Blockvest’s founder promoted the ICO with a fake agency he created called the "Blockchain Exchange Commission," using a graphic similar to the SEC's seal and the same address as SEC headquarters. The defendants also allegedly misrepresented Blockvest's connections to accounting firm Deloitte and continued their fraudulent conduct even after the National Futures Association sent them a cease-and-desist letter, according to the Commission.
The court granted a temporary restraining order freezing assets, prohibiting the destruction of documents, granting expedited discovery, and requiring an accounting.
No securities. To obtain a preliminary injunction, the SEC must show a prima facie case of a previous violation of federal securities laws and a reasonable likelihood that the wrong will be repeated. The SEC argued that the defendants received funds from at least 32 investors in exchange for anticipated BLV tokens and that Blockvest’s manager had 17 other investors during the pre-ICO solicitations and at least eight investors wrote "coins" or "Blockvest" on the checks. The defendants contended that the test BLV tokens are not "securities" as defined under the federal securities laws.
To involve a "security" under the Howey test, a transaction must consist of "(1) an investment of money (2) in a common enterprise (3) with an expectation of profits produced by the efforts of others." According to the court, the "investment of money" prong of the test requires an investor to commit assets to the enterprise in a manner subjecting the investor to potential financial loss. The SEC and the defendants provide "starkly different facts" concerning the promotional materials, economic inducements, or representations the investors relied on before purchasing the test BLV tokens, and the court cannot determine whether the tokens were "securities" under the first prong of Howey. Further, the court stated, the Commission has not demonstrated that the test investors had an "expectation of profits," and there is a dispute as to whether the 17 individuals who invested in Blockvest through its manager purchased "securities" because merely writing "Blockvest" or "coins" on checks is not sufficient to demonstrate what information purchasers were presented with prior to investing.
As it is disputed whether the "sale" or "offer" of BLV tokens involved a security, the court found that there is a dispute as to whether past violations of the federal securities laws occurred and whether there is a reasonable likelihood that a wrong will be repeated. Further, the court noted, Blockvest’s founder acknowledged that mistakes were made and ceased efforts to proceed with the ICO. As a result, the court denied the SEC’s motion for a preliminary injunction.
The case is No. 18-CV-2287-GPB(BLM).
Attorneys: Amy J. Longo for the SEC. Stanley Charles Morris (Corrigan and Morris LLP) for Blockvest, LLC and Reginald Buddy Ringgold, III a/k/a Rasool Abdul Rahim El.
Companies: Blockvest, LLC
MainStory: TopStory Blockchain Enforcement FraudManipulation CaliforniaNews
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