The U.S Securities Exchanges Commission (SEC) has met its first federal opposition in the recent crackdown against ICO projects. According to law.com, a San Diego District Judge, Gonzalo Curiel denied a request for a preliminary injunction by the SEC against the issuers of Blockvest ICO tokens.
Before the new decision, Judge Gonzalo had earlier granted the SEC’s request to restrain and freeze funds raised by Blockvest temporarily. However, further studies by the District Judge show that the SEC has not provided enough evidence to prove that those who invested in Blockvest were hoping to make a profit off the hard work of others. He, therefore, revoked the restraining order against Blockvest.
Buying the dip
The U.S legal system uses the Howey Test to assess what can be classified as securities, and according to Gonzalo, Blockvest tokens have failed to pass the test because there is no evidence that investors put in money in the hope of getting returns.
The Howey Test defines security as - a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.
Inside The Case Between SEC and Blockvest ICO
A filing by the SEC charged Blockvest and founder Reginald Buddy Ringgold III for claiming that their ICO was “licensed and regulated” with the agency.
The regulators alluded to the fact that Reginald used a fake logo that resembles that of the U.S SEC to claim that Blockvest token (BVL) had been approved by a certain Blockchain Exchanges Commission. The fake agency also had the same address as the SEC while a link with the fake logo would direct to the SEC website according to the filling.
In response to the SEC accusations, Blockvest has said that their ICO was only open to 32 entities including companies and individuals who served as testers (a process used to confirm if a software is of good quality. The startup claimed that the testers paid less than $10,000 worth of Bitcoin and Ethereum into the Blockvest Exchange while the BVL tokens only served the same testing purpose.
Making A Decision
While deciding the case, Judge Gonzalo Curiel wrote off a claim used by the SEC to show that Blockvest tokens were securities. The SEC said that those who backed the Blockvest project wrote “blockvest” and “coins” on the cheques used to pay for the tokens.
However, according to the District Judge,
“Merely writing “Blockvest” or “coins” on their checks is not sufficient to demonstrate what promotional materials or economic inducements these purchasers were presented with prior to their investments,”
He further proved in the denial order that the tokens do not pass the Howey test prong which has to do with “investment of money” and “expectation of profits”.
It is on this ground that he freed Blockvest of the formerly imposed temporary restraining order while the case now gets tried in a Federal court.
Arguably, this is the first time that the U.S SEC has faced opposition with regards to their recent crackdown on ICOs. Whether Blockvest comes off victorious or not after the court judgment may not matter as much as the impact being made by the latest court decision.
What The Ruling Means For The ICO Industry
In simple words, not all ICO tokens are securities. We may be on the verge of seeing the first exception where the SEC decides that an ICO should not be classified as a security.
Even though SEC chairman Jay Clayton suggested earlier in the week that almost all ICOs were securities, it is no secret that the regulators have adopted a general approach on how they rate ICOs, hence, the crackdown on almost any ICO that catches their eye.
As Nick Morgan from the Paul Hastings law firm rightly puts it in the report,
“It is only through these sorts of decisions that we will learn the limits of the SEC’s jurisdiction. The SEC should not assume that the courts are going to skate over whether or not there is a security presence.”
From this point, it is expected that the SEC will pay closer attention to the features of an ICO before labeling it a ‘security’ or even imposing any heavy enforcement actions. ICOs now have a voice, and that is what matters.
In the light of the recent court decision, it will also be interesting to see whether the SEC will reduce the momentum with which it sanctions ICOs at least for some time. EtherDelta, Paragon, and AirToken have been called up by the regulators in a little less than a month.
Additionally, thoughts of the SEC coming up with a new regulatory framework for ICO tokens may be premature at this point, but it is also a possibility since the Howey Test may no longer contain all their description of what the innovative fundraising model is.
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