In a preliminary ruling that may be considered as a rebuke to the SEC’s broad definition of a security, a U.S. District Court in Southern California rejected a motion by the federal agency to bar Blockvest LLC, a startup, from conducting an ICO for sale of its tokens. The federal agency had obtained an emergency court ruling in October to stop Blockvest because the startup had falsely claimed regulatory approval for its $100 million ICO. The same court that issued the emergency ruling, however, refused to characterize the Blockvest’s tokens as securities.
The regulatory status of ICO tokens is unclear. SEC Chairman Jay Clayton earlier this year clarified that bitcoin was not a security but the other ICO tokens he had seen were securities. Security tokens are more expensive and require significantly more disclosure and legal compliance as compared to utility tokens. The SEC uses the three criteria – investment of money in a token, expectation of profit by investors, and the establishment of a common enterprise to market the token – from the Howey Test to evaluate whether a token is a security. In his ruling, U.S. District Judge Gonzalo P. Curiel stated that the court could not determine whether the 32 “test investors” ahead of the actual ICO relied on promotional and marketing material to make their decision regarding purchase of Blockvest’s test tokens.
What Does Blockvest’s Whitepaper State?
Blockvest’s whitepaper does not provide much clarity on the value of its token. The Blockvest token is initially defined as a utility token on ethereum’s blockchain in its whitepaper. The BLV token is representative of the share of an investor in a cryptocurrency index fund that invests in the top 10 cryptocurrencies, states the paper. But the paper also refers to the pioneering of a “Token-as-a-Fund” business model and “profit-sharing smart contracts”. Subsequently, the token is referred to as a “novel, decentralized asset, whose intrinsic value is derived from the fees generated in the network it collateralizes as well as the right to receive quarterly earnings from the performance of the Blockchain Investments Fund.”
In recent times, the SEC has cracked down on ICOs and warned the general public about their dangers. Coupled with the downturn in cryptocurrency markets, the agency’s actions have brought about a chill in ICO markets. In response, entrepreneurs have increasingly taken to private placements from investors to fund their blockchain ventures.
While it was positive, yesterday’s ruling will not stop the SEC from pursuing startups that break securities laws. “I think this decision is evidence that these cases are factually nuanced, legally complex, and quite far from layups,” wrote Marco Santori, founder of blockchain.com – a trading and custody platform for cryptocurrencies, on Twitter.