In a case being closely watched by the crypto community, a California federal judge reversed his earlier decision and, on reconsideration, issued a preliminary injunction against ICO issuer Blockvest LLC. Although the SEC has a high success rate in litigated cases, its action against Blockvest was notable because the judge initially declined to grant the SEC’s request for a preliminary injunction, then ruling that “at this stage, without full discovery and disputed issues of material facts, the Court cannot make a determination whether the BLV token offered to the 32 test investors was a ‘security.’” After reviewing new evidence, the judge subsequently reversed his position and found that Blockvest had indeed issued a security.
According to the SEC’s complaint, originally filed in October 2018, Blockvest and its promoter claimed that they were planning to raise funds through an ICO for several financial products that would generate passive income and double-digit returns. In doing so, the SEC alleges that they made misrepresentations about the firm’s regulatory status. According to the SEC, the defendants used the SEC seal without permission and falsely claimed that their crypto fund was “licensed and regulated.” Blockvest’s promoter is also alleged to have promoted the ICO with a bogus regulatory agency he created, which he dubbed the “Blockchain Exchange Commission,” complete with a seal similar to the SEC’s, a website that redirected to sec.gov, and with a street address identical to the SEC’s Washington headquarters. Of note, the judge concluded that “the contents of defendants’ website, the white paper and social media posts concerning the ICO of the BLV tokens to the public at large constitute an ‘offer’ of ‘securities.’”
Faced with the prospect of prolonged litigation against the SEC and the attendant costs and reputational impact, many ICO promoters facing enforcement action from the SEC have elected to settle their cases. But a few have recently declined to do so and instead have opted to litigate the issue by asserting that their particular coins do not satisfy the Howey test. The Blockvest case serves as a reminder that this strategy is not without risk. SEC Commissioner Peirce, known in some circles as “Crypto Mom,” in recent remarks suggested that the agency is still at work at preparing further ICO guidance. The crypto community will no doubt welcome greater clarity in this space.