Court Rules Against SEC in ICO Lawsuit

A federal judge has denied the US Securities and Exchange Commission (SEC) a preliminary injunction against Blockvest after he granted a temporary restraining order on the same issue. 

December 04, 2018 | AtoZ Markets – The US federal court ruled a case last week between the SEC and a crypto initial coin offering (ICO) project called Blockvest in favor of the ICO project. The chief legal officer and president of Blockchain, Marco Santori said:

“The SEC brought an enforcement action against a company called Blockvest, alleging that Blockvest’s ICO was a securities offering. SEC asked the court for a preliminary injunction (an order freezing Blockvest’s assets, among other things) so it called a hearing on the evidence.”

While the SEC was unable to justify that the ICO in question was actually a security, the court on its part refused to acknowledge the aforementioned token as a security based on the distribution method of the asset.

Precedent For the Market

However, the unexpected decision of the federal court cannot be necessarily considered a loss for the SEC nor a huge victory on the part of the cryptocurrency sector. According to the SEC chairman Jay Clayton, most ICOs that investors in the market talk about are mostly considered securities under existing US regulations.

Nevertheless, the outcome of this case established a precedent for the market and with some technicalities, that some ICOs could potentially challenge the SEC in court and come out victorious if there is sufficient evidence to support the case.

Furthermore, investors in ICOs and the SEC could also become more cautious when filing a lawsuit against an ICO project, as the court requires the plaintiff to give a clear description of the nature of the asset as a security that is unaffected by the method in which the asset was introduced to the market. Santori further added:

“According to the court, in the ICO context there must be a ‘risk of financial loss’. This supports the proposition that something like an airdrop, by itself, cannot be a securities offering, even if the airdropped tokens are pre-functional. Admittedly rare today but possible.”

The Blockchain chief legal officer, who manages the most widely utilized cryptocurrency wallet platform in the world, stressed that the federal court “went out of its way” to reject the claim from the SEC that the simple act of distributing an asset via an airdrop or a token sale is a security as it repeated its stance that a token offering in itself is not a security.

A significant part of the case was the requirement of the court to the SEC to establish the evidence that an investor bought the token because the investor was offered the security directly by the issuer.

For example, if an investor in an ICO is to file a lawsuit against the project, the investor will be required to somehow prove, that the investor directly invested in the token sale by looking at the website, whitepaper, or some other information provided by the issuer.

Suing an ICO Project Now Complex

The recent federal court ruling has already established a more complex environment for both the SEC and investors in ICOs to challenge the issuer of a token and to verify that a token is a security based on US regulations.

According to Santori, the precedent created by the Blockvest case has raised the bar for any plaintiff seeking to sue ICO issuers. He concluded:

“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.”

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